Buy State Bank of India (SBI) Target :Rs 2200 ::ICICI Securities

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H u g e   s l i p p a g e s   b u t   s t el l a r   p r o f i t   g r o w t h…
Stellar profit of | 2800 crore, up12% YoY and 77% QoQ, reported by SBI
was substantially higher than our estimate as provisions were lower than
our expectations. Operational performance continued to be robust with
NIM improving to 3.79% in Q2FY12 from 3.62% Q1FY12. Management
has revised its guidance on NIM upwards from 3.5% to 3.65% for FY12.
GNPA added | 8000 crore in a single quarter, which was higher than our
expectations leading to GNPA ratio reaching a record high of 4.19% and
NNPA ratio rising to 2.04%. This led to a disappointment that slippages
would remain high and provisions are not expected to come down soon.
Added to that is the pressure of investment book MTM expected to be
taken in Q3FY12 due to a spike in G-Sec yields to 9%. We have revised
PAT estimates and expect PAT growth of 16.3% for FY12E to | 96.2 bn.
ƒ Credit growth at 16% YoY but NNPA rises 30% QoQ…
Though credit grew 16.2% YoY to | 7906 billion, slippages
increased by | 80 billion in Q2FY12 from | 62 bn in Q1FY12 mainly
due to agriculture and corporates basically sectors like iron & steel,
gems and jewellery, etc. Within this, | 17.6 bn has slipped from
restructured assets. Net addition after w/off and upgrades was at |
60billion increasing GNPA ratio to 4.19% (| 339.5 bn) from 3.52%
QoQ. NNPA ratio increased to 2.04% (| 161.2 bn) from 1.61%.
ƒ NIM increase meeting management guidance…
As indicated by the management, NIM rose by 37 bps to 3.79% from
3.62% sequentially. With the benefit of base rate hikes and some
deposits due to be repriced at lower rates, overall margins have
been moving northwards for SBI. CASA growth has remained
strong at the 48% ratio and savings deposits alone added over | 290
billion in the last six months boosting NIM further.
V a l u a t i o n
We believe that with accumulated profits and | 30-40 billion capital
infusion from the government, SBI will be able to manage 16-18% growth
and margin of 3.65% as indicated. We expect incremental NPAs to
continue for the next two quarters but stabilise next year while overall
RoA of 0.8-0.9% and RoE in the range of 14-15% could be maintained.
We, therefore, maintain our target of | 2200 and rate the stock as  BUY
from a long-term perspective

Jubilant Foodworks: Early warning signals visible : Kotak Sec,

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Jubilant Foodworks (JUBI)
Consumer products
Early warning signals visible. While JUBI reported 47% sales growth, same-store
growth (SSG) of 27% was below estimates. Most important, the SSG volumes are
<20%, in our view (possibly due to ~10% price increase yoy for an already expensive
product—average price of a pizza is ~Rs200 and average bill value is >Rs300, in our
view). It is likely deviating from its policy of limiting price increases to ~6% p.a. as it
looks to protect gross margins (GM). Despite price hikes, GM declined 160 bps yoy.
Growth in rent in line with sales growth likely indicates slower-than-expected ramp-up
of newer stores, in our view. JUBI is planning to increase marketing spends to address
any potential impact of demand slowdown. SELL. Our DCF-based TP remains Rs750.

Eye on India Following - Goddess Lakshmi ::Macquarie Research,

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Eye on India
Following Goddess Lakshmi
Event
 As India gears up to welcome Goddess Lakshmi (Goddess of Wealth), we
look at the flow of Financial Institutional Investors (FII) money into Indian
companies.
 FIIs have pulled out US$650m on QoQ basis and their holdings in Indian
stocks have eroded by 15bps. FIIs have turned defensive and have moved
money out of Financials, Materials, Industrials, and IT and moved into
consumer discretionary, staples, utilities, healthcare, energy and telecom.
 Since Dec-10, FIIs have sold more large caps as their holding has seen a
120bps decline, but they retained mid caps where the aggregate holding is
down just 20bps. The top-5 large-cap gainers during Jun-Sep were M&M,
DRRD, HMCL, ACC and BPCL; while the top-5 losers were AXIS, HNDL,
Tata Steel, SBI and JSP.
Wish you a very happy and prosperous Diwali. Next issue of "Eye on
India" will be on 4th Nov.
What caught our eye?
 Which way to go? Markets are looking for direction and speculation is
abundant ahead of the Euro-Zone Summit (Oct 23) and the G-20 meeting
(Nov 4). As of 20 Oct, global markets were down WoW, with the MSCI World
and EM indices down 1.6% and 3%, respectively; India was broadly flat at
+0.3% on the Sensex and -0.1% on the MSCI India. Banks (+1.7%) was the
best performing sector while capital goods (-2.3%) was the worst. FII net
inflows were +US$153m while MFs net sold US$84m. Our top-10 list was flat
this week but continues to outperform MSCI India by 720bps since Aug-10.
 World Bank and Moody’s say growth slowing; FM finally agrees: The FM
admitted that the govt. is concerned about missing growth and fiscal
consolidation targets as crude prices, domestic inflation and interest rates
continue to remain high (Link). While Moody’s said growth is ‘slowing sharply’
(Link), WB pegged the growth trend at 7-8% pa for the next two years (Link).
 Govt. says, wait another day to tap own gas resources: The Oil Ministry
postponed the shale gas exploration policy to next year as it has hit a
roadblock due to environmental concerns and land acquisition (Link).
 Food inflation pushes up again: Weekly data showed food inflation rising
130bps to 10.6% on high vegetable prices (Link). RBI continues to be hawkish
but has been giving mixed signals of late; watch out for the Oct 25 meeting.
 On a lighter note, F1 and Metallica debut next week: Among the top-10
most watched sports (Link) and the band in Rolling Stone’s ‘100 greatest
Artists of All time’ (Link) finally come to India! Sounds fast and rocking!
Outlook
 Cracker of a week ahead, but don't get cracked: Next week is shortened
due to Diwali but will likely pack a punch. Expect high volatility driven by
gyrations in Europe, results in India and RBI policy meet. Companies posting
good results are starting to Outperform. Two of our top 10 stocks JSP and Infy
reported good results and have started to outperform. Watch out for results!

buy JAMMU & KASHMIR BANK : TARGET PRICE: RS.1060 : Kotak Sec

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JAMMU & KASHMIR BANK
PRICE: RS.823 RECOMMENDATION: BUY
TARGET PRICE: RS.1060 FY13E P/E: 4.7X, P/ABV: 0.9X
Q2FY12 Results: Largely in line quarter
q NII came at Rs.4.34 bn (16.5% YoY), in line with our expectations, on
back of healthy loan growth (21.8% YoY) and marginal NIM improvement
(3bps YoY) to 3.69% during Q2FY12. Net income grew 22.3% during
Q2FY12 mainly aided by lower provisions and contingencies (decline
of 42.5%).
q Muted non-interest income (decline of 4.4% YoY) at Rs.712 mn during
Q2FY12 came on the back of lower trading profit (decline of 53.3%)
which fell from Rs.1.82 bn during Q2FY11 to Rs.0.85 bn during Q2FY12.
q J&K bank has witnessed healthy balance sheet growth - loan book and
deposits grew at 21.8% and 19.5%, respectively during Q2FY12. Its liability
franchise (CASA mix has come at 38.2% at the end of Q2FY12) has
remained healthy, despite ~220bps contraction QoQ, vis-à-vis its peers.
q Its asset quality continues to remain amongst the best in class - gross
NPA and net NPA remained stable at 1.89% and 0.22%, respectively, at
the end of Q2FY12. Its coverage ratio is also one of the best and now
stands at 88.4% (92.0% including technical W/O) at the end of Q2FY12.
q At the current market price of Rs.823, stock is trading at 4.7x its FY13E
earnings and 0.9x its FY13E ABV. We retain BUY rating on the stock with
unchanged TP of Rs.1060 based on 1.1x of its FY13E adjusted book value.

JSW Steel: Uncertain outlook may override a strong quarter:Kotak Sec,

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JSW Steel (JSTL)
Metals & Mining
Uncertain outlook may override a strong quarter. JSW Steel reported 2QFY12
standalone EBITDA of Rs13 bn (-7%qoq). JSW handsomely beat our profitability (27%
beat) estimate on the back of (1) lower-than-expected raw material cost increase and
(2) decline in staff costs. Nonetheless, core issues of iron ore sourcing and costs,
production ramp-up and sustainable decline in profitability will weigh on performance.
Cut EBITDA estimate by 3-7% for FY2012-14E and TP to Rs560 (Rs660 earlier). SELL.

Yes Bank- Mixed quarter: Macquarie Research,

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Yes Bank
Mixed quarter
Event
 Yes Bank reported 2Q12 PAT of Rs2.4bn up 33%YoY and 6% above our
estimates. The surprise was mainly due to stronger than expected fees
growth. We retain Outperform.
Impact
 Loan growth including credit substitutes healthy. Loan growth including
credit substitutes (basically corporate bonds and commercial paper) grew at
27%YoY. Management indicated that larger clients preferred corporate bonds
rather than loans, given higher loan rates. The loan book itself grew by
~13%YoY, which management expects to accelerate to 25% by end of FY12E.
 Margins increased 10bp QoQ. Net interest margins were up 10bp QoQ to
2.9%, in line with our estimates. The key driver was loan repricing, as loan
yields increased 60bp QoQ. We expect the bank to be able to maintain the
current margin levels for FY12.
 CASA growth was disappointing, being virtually flat in the quarter.
 Non interest income enjoyed a strong quarter. Non interest income grew
63% YoY and was the key driver for surprise. Income from financial markets
including forex income nearly doubled YoY, while financial advisory, the biggest
component of non-interest income, was up 54% driven by debt syndication fees.
According to management, the deal pipeline remained strong.
 Micro finance restructurings were in this quarter. Three MFI accounts
were restructured by Yes this quarter, amounting to Rs900m. Management
believes it has adequately provided for these assets. Restructured assets
constitute 0.5% of total loan book, one of the best in our coverage universe.
 Gross NPLs were up 23%QoQ on a small base but coverage remained
comfortable at 80%.Delinquencies this quarter were very low at 0.2% of loans.
 Given the adverse capital market conditions, management does not have any
immediate plans to raise capital. We have not build in any capital raising in
our numbers for FY12E.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs380.00 based on a Gordon growth methodology.
 Catalyst: pick up in loan growth in 2HFY12E
Action and recommendation
 Given the return ratios, valuations remain attractive. Maintain OP

Thermax: Base business supports ordering; remains cautious on large-size projects capex: Kotak Sec,

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Thermax (TMX)
Industrials
Base business supports ordering; remains cautious on large-size projects capex.
Thermax reported steady ordering (all divisions except EPC projects grew yoy; run rate
in line to meet our full-year estimates) as it focuses on regular orders (less elastic
demand, local competition, market preference). Such strong performance may
materially improve as cycle picks up and new ventures start contributing (ties up for
building chemicals, solar technologies). Thermax remains cautious on near-term
outlook, especially for large-sized EPC projects in steel and power. Retain ADDCurrent ordering primarily supported by regular orders; can pick up materially as cycle improves
Thermax’s present levels of ordering despite weak contribution from cement and power sectors
(15-17% share in 1H versus 40% in past) is commendable and may materially improve as cycle
picks up. The company is focusing on lower-end, base orders and is benefitting from (1) less elastic
demand (low ticket investment size), (2) lower competition (only local) (3) better execution and
margin, and (4) market preference for its products. It is also expanding its opportunity set into
building chemicals and concentrated solar PV cells business through various foreign tie-ups
Remains very cautious on near-term outlook, especially for larger EPC projects
Thermax management remained cautious on the near-term outlook for the capex momentum
especially in the steel sector on higher interest rate (big ticket investments) and input constraints
(steel price, lifting of coking coal subsidy). It was also bearish on demand in power sector (coal
concerns, stagnant investments in projects) which would require structural changes in the industry
(government policy on mining, land acquisition etc.). The company does expect some recovery in
the cement sector (prices to stabilize as capacities are absorbed). It did witness traction in O&G
(30% of 2Q ordering) and food processing sector as inflows pick up in 2QFY12.
Guides for steady ordering and revenue moderation; unviable bulk tender pricing not a benchmark
The company expects 2H ordering to match 1H (Rs26 bn so far), broadly in line with our order
estimate of Rs50 bn in FY2012E. It, however, expects revenue growth in 2H to moderate versus
the strong 25% growth in 1H. Thermax did not bid seriously for NTPC bulk tender (would have
had to import first few equipments) but believes that the winning bids appear non-remunerative.
Retain ADD rating on reasonable valuations, expanding opportunity set and strong balance sheet
We marginally revise estimates to Rs33.9 and Rs33.7 from Rs31.9 and Rs31.7 for FY2012 and
FY2013 on incorporating Danstoker’s numbers in our model. We revise our FY2013E multiple to
15 from 16 on weak capex environment (unchanged TP) and reiterate our ADD rating on
(1) attractive valuations, (2) expansion of business opportunity and (3) strong balance sheet.

.

Andhra Bank: Balance sheet cleansing : Kotak Sec,

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Andhra Bank (ANDB)
Banks/Financial Institutions
Balance sheet cleansing. Andhra Bank 2QFY12 saw gross NPLs rise 70% qoq as
system migration brought out slippages of 6% during the quarter, primarily from
agriculture, retail and marginally more from SME. The bank’s large corporate portfolio
continues to remain healthy. We reduce our estimates to factor higher provisions but
expect recoveries to improve (including coverage ratio) in the next few quarters. Healthy
NIMs are providing support to higher credit costs. Maintain BUY with a TP of `170
(from `190).

HDFC Bank - In-line numbers, credit costs the key driver: JPMorgan,

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HDFCB reported in-line profits (Rs 12.0bn, up 32%y/y) for 2Q. The key
driver was lower credit costs, with delinquencies and provisions
continuing at well below trend levels. This offset a slight squeeze on
NIMs, largely due to a slight fall in the CASA ratio. Overall, the bank
delivered solid numbers.
 Improving asset quality. Credit cost improvement continued to be
strong, with a 25bp q/q improvement to 80bp for 2Q. Retail asset quality
has been very strong for all banks, given rising incomes, greater industry
discipline and improving effectiveness of credit bureaus. Our forecasts
imply an uptick from here, as we factor in a slowing economy.
 Slow PPOP growth. There was a small margin squeeze (10bp q/q,
based on our calculations), driven mainly by an ~180bp drop in the
CASA ratio. The CASA squeeze was largely led by migration to term
deposits because of high interest rates. We think CASA migration could
remain a little pressured for 1-2 more quarters – strong customer
addition (branch additions have been robust) is an offset.
 Loan growth in line. The headline 20% y/y loan growth number is
tainted by lumpy year-end balances in Sep 10 and core loan growth was
26% y/y. The LDR dipped ~150bps to 81.7% from 83.1% (term deposit
addition was very strong). Retail loans slightly outpaced the wholesale
segment - while demand in some segments like autos is slowing, CV and
business banking has picked up the slack.
 Top pick. HDFCB remains our top pick, given its earnings resilience
and improving ROAs. Improving return ratios has been the hallmark of
the bank’s performance in the last 2-3 years, and we expect ROEs to
touch 20-21% by FY14 – levels not attained since the early noughties.
The premium valuations are supported by fundamentals, in our view.

HT Media: Cyclically weak 2QFY12: Kotak Sec,

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HT Media (HTML)
Media
Cyclically weak 2QFY12. HTML reported apparently weak 2QFY12 EBITDA of Rs671
mn (+4% yoy). However, adjusted EBITDA of Rs789 mn (+22% yoy) was in line with
expectations, adjusted for (1) Rs63 mn forex losses and (2) Rs55 mn of ad-for-equity
provisions. HT Delhi ad growth slowed to ~4% yoy, reflecting the cyclical impact on
English dailies (slowdown in real estate ads in Delhi-Mumbai); the impact of currency
fluctuations is yet to be felt on newsprint costs though cost rationalization is possible.
Structural drivers (Hindustan, HT Mint and HT Mumbai) sustain but Fever FM surprised
negatively in 2QFY12. Retain ADD with FV of Rs170 (Rs190 previously) and await end
of cyclical downturn or better valuations (~15X FY2013E EPS estimates).

TERM INSURANCE PREMIUM - Table :: 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.

Grasim Industries: VSF - volume spurt offsets weak pricing: Kotak Sec,

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Grasim Industries (GRASIM)
Cement
VSF – volume spurt offsets weak pricing. Grasim Industries reported a strong 22%
outperformance with net income of Rs4 bn led by 44% sequential increase in VSF
volumes that partially absorbed the weakness in VSF prices. We are encouraged by the
stability in VSF pricing after the slump witnessed during the quarter, though remain
watchful of the overall demand environment. At 9X on FY2013E earnings, Grasim
remains our preferred pick in our cement coverage. Maintain BUY and PT of Rs2,900.

HDFC -Scrapping of pre-payment penalties is negative ::Macquarie Research,

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HDFC
Scrapping of pre-payment penalties is
negative
Event
􀂃 What has happened? The housing finance regulator, NHB, yesterday issued a
notice to all housing finance companies, asking them:
􀂃 (i) To scrap pre-payment penalties on all floating rate home loans. It has also
asked them to scrap pre-payment penalties on fixed rate home loans if the
borrower is pre-paying using his own fund sources. However if the borrower is
doing a loan transfer from one bank to another in case of fixed rate loans, the
penalties remain. In case of violation, NHB will take penal action.
􀂃 (ii) To ensure the rates charged to old and new customers/borrowers are
uniform irrespective of when the loan was taken. Note that this diktat is more
in the form of advisory and did not talk of any penal action in case of violation.
Impact
􀂃 Will encourage loan transfers: The high pre-payment rates usually charged
by companies like HDFC Ltd have acted as a deterrent to switching loans
from one company to another. However with the abolishment of pre-payment
charges, there could be loan transfers that could negatively affect in 2 ways:
1) loan book growth could slow; and 2) ALM management would be difficult.
􀂃 What will be the financial impact? Usually the pre-payment charges are
between 1% and 4% of the outstanding loan amount. HDFC Ltd, during the
time when SBI launched the teaser loan products, used to charge as much as
3-4% in order to discourage borrowers from switching over. Under normal
circumstances pre-payments are not more than 20% of the outstanding loan
amount per year and most housing finance companies allow that without any
pre-payment penalties. So the financial impact on an immediate term basis is
unlikely to be high in our view. HDFC Ltd management clarified that the prepayment
penalty fees per quarter are around Rs300mn, which is roughly 2%
of earnings. The management didn’t give us an estimate as to what could be
the impact if rates were to be aligned for old as well as new customers.
􀂃 Are banks affected by this? Note that this circular is issued by NHB, the
housing finance regulator. RBI has talked in several forums about
abolishment of pre-payment charges but hasn’t issued an official notice as of
now. However we believe it’s just a matter of time and even banks will have to
follow this. Most PSU banks don’t have any pre-payment penalties on their
housing loans. Private Banks do have pre-payment penalties of around 2-3%.
Earnings and target price revision
􀂃 No change.
Price catalyst
􀂃 12-month price target: Rs775.00 based on a Sum of Parts methodology.
􀂃 Catalyst: steady loan growth and margins
Action and recommendation
􀂃 It’s difficult to quantify the impact of the above regulatory changes as we need
to wait and see how the mortgage market would change post the above
guidelines. There could be predatory pricing by banks especially PSUs (for eg
SBI’s teaser loan scheme) in times of excess liquidity which could affect
growth for institutions like HDFC Ltd. ALM management would be more
difficult, thereby making spreads volatile and there could be some impact on
spreads if rates were to be aligned for new and old customers. Nevertheless
the way we look at this is that the high multiple accorded by the market to
HDFC Ltd is likely to come down over a period of time and the stock could get
structurally de-rated.

Dish TV -Q2FY12: Operating performance in line; profits impacted by one-offs:: JPMorgan,

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DITV reported weaker-than-expected 2Q earnings on account of one-off items
that include Rs190MM pre-payment of commissions on set top boxes shipped
ahead of the festive season and Rs304MM MTM notional forex loss on USD
debt. ARPU for the quarter improved to Rs152 with exit ARPU of Rs154.
Management expects FY12E exit ARPU of Rs160-165. Subscriber additions
slowed during the quarter, even as management maintained full-year
guidance of 3-3.5MM gross additions.
 Operating performance stable. DITV added 0.58MM new subscribers in
Q2FY12 and 1.3MM new subscribers in 1H. Management noted that they have
seen good uptick in additions in Sep and Oct, ahead of the festive season and
maintains their guidance of 3-3.5 new subscriber additions for FY12E. ARPUs
improved to Rs152 (+1% QoQ) driven by consumer upgrades and higher HD
contribution. Subscriber acquisition cost (SAC) increased 9% QoQ to Rs2, 232
on higher marketing spend.
 Digitisation to boost DTH. Management indicated that the cable digitisation
ordinance expected in 4Q would open up more opportunities for DTH players.
Cable operators would have to incur huge investments in infrastructure and
marketing to penetrate the analog cable market. Further, ARPUs would have to
go up for cable operators as carriage fees go down and cable system becomes
more transparent. DTH players with their existing set up and HD offerings are
in a much better competitive position to benefit from cable digitisation vs. cable
operators.
 On track for 4Q free cash break-even. Revenues up 5% QoQ (+48% YoY)
driven by 0.3MM net subscriber adds QoQ and 1% QoQ ARPU improvement.
EBITDA margins up 90bps QoQ, excluding pre-payment of commissions
(which are paid on shipments vs. revenues which are booked on activation),
EBITDA margins are up 480bps QoQ. Reported net loss is Rs486MM,
excluding one-offs, DITV would have reported profit of Rs4MM.
 Retain OW and Sep-12 PT of Rs100: Our PT is based on 15x Sep-13E
EV/EBITDA. Key risks include increasing competition pressuring pricing,
adverse regulatory changes, and content cost re-negotiation. We are keenly
watching the ARPU and cash generation trend, which we believe are critical to
stock performance from here on.

Power Grid – Capitalisation gaining momentum ::RBS

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PWGR’s 2QFY12 adjusted profit at Rs7.8bn (up 31% yoy) was higher than our estimate of
Rs7.3bn, primarily on higher other income. In the quarter, PWGR capitalised ~Rs32bn worth of
assets, taking 1HFY12 capatilisation at ~Rs40bn, in line to achieve our estimate of Rs80bn for
FY12. Buy.

Phoenix Mills: Valuation visibility improves further with second launch of FY2012:Kotak Sec,

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Phoenix Mills (PHNX)
Property
Valuation visibility improves further with second launch of FY2012. We attended
the inauguration of Bengaluru Market City (0.9 mn sq. ft). While 75% of the area has
been committed for lease / leased out and 100 stores opened, key to monitor would be
(1) ramp-up of stores and performance of these recently launched (Pune and Bengaluru)
market cities, (2) launch plans for Mumbai and Chennai and (3) potential residential
launches in 2HFY12E. We retain our BUY rating with a target price of Rs300 at par with
our March-2013E NAV.

United Phosphorus – On track with strong tailwind ::RBS

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UPL's 2Q revenue rose 41% and EBITDA 40% yoy, in line with our forecasts. Net income
was impacted by FX losses. We believe UPL will benefit from a strong tailwind in the global
crop protection business, while its valuation is factoring in too much risk. We adjust our
forecasts and target price but remain at Buy.

TCS bags US$2.2bn order :Angel Broking,

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TCS bags US$2.2bn order
Diligenta, the business process outsourcing (BPO) provider in the UK and a
subsidiary of TCS, announced that it will assume administration responsibility for
3.2mn policies for Friends Life, a provider of pensions, investments and insurance.
The agreement, effective from March 1, 2012, is worth US$2.2bn (£1.37bn) over
15 years. This major business win will increase the total number of policies
administered by Diligenta to just under 8mn. Outsourcing much of its customer
service and IT functions for its UK heritage business will allow Friends Life to focus
on its new proposition developments, including its new corporate platform, in its
core markets of corporate benefits, protection and retirement income.
Diligenta will assume administration responsibility for much of Friends Life’s closed
book protection business and a significant part of its corporate benefits business.
Diligenta and TCS will deliver IT infrastructure and IT services with some policies
migrating to TCS BaNCS Insurance, a globally recognized industry-leading
insurance platform. As a result of this new arrangement, a total of approximately
1,900 Friends Life roles across a number of office locations in the UK will transfer
under their existing terms of employment to Diligenta. All those who will transfer
would continue to service Friends Life’s customers, ensuring both continuity of
service delivery and expertise. This is the second biggest order ever signed by TCS.
We continue to maintain our Accumulate recommendation on the stock with a
target price of `1,220.

Idea Cellular Q2'FY12 wrap: Weak volumes and margins a concern:: JPMorgan

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Idea’s sharp bottom-line miss in Q2 reflects a weak operational performance
and was also somewhat impacted by higher D&A and net interest expenses.
While we welcome the healthy 4% ARPM increase, we don’t dismiss the
possibility that the 7% decline in MOU suggests both seasonality and
elasticity within Idea’s sub base to the tariff hikes. We're disappointed with
the decline in margins in Idea's new circles and we don’t expect a quick
recovery here. We would be looking for a favorable resolution of regulatory
issues or a better entry point to turn more positive on Idea. Maintain N.
 Elasticity an issue? While Idea added above industry subs in the quarter
(monthly aver net adds -10% Q/Q vs. -33% for the GSM market), its MOU
declined 7% Q/Q driving a 2pp+ decline in total volumes. While seasonality
is strong in Q2, we don’t dismiss the impact of elasticity to increased tariffs.
ARPM increased by 4% Q/Q driven by higher VAS, roaming revenue but
also the tariff hikes (voice ARPM increased 3pp on our estimates).
 Margin weakness a concern: Consolidated EBITDA margin declined Q/Q
despite the 1.7pp improvement at Indus. In Idea’s established circles,
margin declined by 20bp to 39.4% while in its new circles it declined by
6.7pp to -35.7% breaking a six-quarter trend of improving margins here.
 Forecast changes: We have changed our FY12/FY13 revenue estimate by
+0.9%/-2.3% while our margin estimate is now lower by 30bps/60bps.
FY12/FY13 EPS is now INR 2.5/3.6 vs. INR 2.9/4.5 earlier.
 Revised regulatory impact: We have revised our estimate for the
quantified impact of regulations to -Rs20/share from -Rs13/share earlier
driven by [a] a smaller estimated benefit from lower license fee and [b] to
account for the higher spectrum usage charge already provided for.
 Our new Mar-12 price target is Rs 81 (earlier Rs87). It is based on a DCF
of Idea’s core business, Indus Towers and Rs20 downward regulationrelated
adjustment. Idea trades at 6.7x FY13E EV/EBITDA, implying 7%
premium to Bharti. Key risks: [upside] monetization of tower assets,
potential M&A activity [downside] unfavorable regulations outcome, new
circles drag.

Answers ::Mutual Fund Talk ::Business Line

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I am a 42-year old public sector employee drawing Rs 20,000 a month without a pension facility. I have a son and daughter aged 11 and 6 years respectively. Presently I am able to save about Rs 5,000 a month from my salary. I hold Rs 5,00,000- in the form of fixed deposits in banks. I am contributing the following sums by way of monthly systematic investments (SIP) in the following mutual funds.

1) Birla Sun Life Dividend Yield Plus - Growth- Rs 8000.

2) ICICI Focussed Bluechip Equity - Growth- Rs 5000.

3) IDFC Premier Equity Plan B - Growth – Rs 6000.

4) IDFC Small and Midcap - Growth- Rs 2000 per.

I opened a sweep account in HDFC Bank for an amount of Rs 5,00,000 to be made use of for the above SIPs. The SIPs were opened 4 months ago for a period of 5 yeaRs Do let me know if the funds I chose are good. Also please let me know if my portfolio strategy is right to reach a sum of Rs 1 crore by the time I retire?

M.C.S. Raju

Tirupati

You are investing too much of your savings in equity funds. Your four SIPs put together add up to Rs 21,000 per month. That is higher than the total monthly salary that you are earning. You may be able to afford the SIPs you mentioned for about two years by using up your balance of Rs 500,000 in HDFC Bank, but how will you continue with the instalments after that?

This is why, before we come to the choice of equity funds for you, we think you need to put a basic financial plan in place. Budgeting for retirement is a good move. However, you may need to save up towards other goals too in the intervening period - the education of both your children, possible emergencies for you and your family and other expenditures that may crop up before you retire at 60.

That is why even if you are targeting a Rs 1 crore corpus you cannot afford to have a 100 per cent equity portfolio. Your equity investments can suffer big swings in the short term and you may find it difficult to withdraw money from them at short notice. Therefore, before you divert your surpluses entirely into equity funds, we suggest that you set aside a portion of your savings towards emergencies. Your balance of Rs 5 lakh in HDFC Bank should be used for this purpose and not for funding your SIPs.

* Move Rs 1.2 lakh from your savings account into a fixed deposit that earns you 9 per cent or more. Lock into five-year deposits now, while the rates on offer are high. Don't use this money unless you come up against an emergency. This Rs 1.20 lakh covers six months of your gross salary. As and when your salary increases, do add to this emergency fund.

* Invest the remaining Rs 3.80 lakh in two Balanced Funds- HDFC Prudence and DSP Black Rock Balanced Fund. These funds may be able to generate a 15 per cent return with limited risk. These investments are likely to grow to about Rs 12 lakh in 8 years at an assumed 15 per cent return. We hope this will come in handy for your children's education.

* Coming to the Rs 1 crore corpus that you hope to have by retirement, that will require you to invest another Rs 9,500 per month in SIPs until you retire, in equity funds. However, as you work in a public sector company, we assume that you must be making a provident fund contribution from your salary every month. That will take care of part of your retirement needs.

Assuming that you contribute Rs 1500/month over 30 years of service and the provident fund balance earns 8 per cent a year, you will be able to accumulate Rs 22.50 lakh by the time you are 60. This will leave you with a shortfall of Rs 77.50 lakh that you will need to build. Now, calculations show that an investment of Rs 7000 per month in SIPs over the next 18 years will get you to that sum if equity funds deliver a 15 per cent return. Therefore, Rs 7000/month is the net sum you need to save in order to get to the targeted corpus of Rs 1 crore by retirement.

Given that you would be putting a large chunk of your savings into equity funds, we would suggest you stay with the most conservative options in the equity space. This cannot completely protect you from short-term erosion in your portfolio due to corrective or bear phases in the stock market. However, it can reduce the extent of losses that you face in an adverse situation.

Keeping the above in mind, we think funds such as IDFC Small and Midcap and IDFC Premier Equity (though good funds in their category) are not ideal fits for your portfolio. Instead of the funds you have listed, we suggest putting Rs 3,000 per month each in HDFC Top 200 and Birla Dividend Yield Plus and Rs 2,000 in FT India Dynamic PE Ratio Fund. Don't forget to check back on your portfolio at least twice a year to review your funds.

Asian Paints: Decelerating volume growth trajectory: Kotak Sec,

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Asian Paints (APNT)
Consumer products
Decelerating volume growth trajectory. While APNT’s 2Q results disappointed lineby-
line, the key is volume growth slowdown—in three quarters of CY2011, it was 12%,
11% and 8% (despite a 4% decline in base), in our view. APNT is likely headed for a
volume decline in 3QFY12E, in our view. Modest qoq improvement in gross margins is
no solace as Rupee depreciation could likely impact gross margins in 2HFY12E. The
management-attributed reasons of extended rainfall and Telengana agitation impacting
demand in 2Q appear less convincing as the base quarter also had extended rainfall and
Andhra accounts for just ~7% of sales. SELL.

India telecom sector -Stage set for Bharti‟s Qualcomm buy? ::Macquarie Research,

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India telecom sector
Stage set for Bharti‟s Qualcomm buy?
Event
 The government‟s Department of Telecom has (finally) granted Qualcomm the
Internet Service Provider license. Qualcomm had bid and won 20MHz BWA
spectrum (2.3GHz band) for over US$1bn in 4 circles (Mumbai, Delhi, Kerala
and Haryana) at the auction held in June 2010. We believe this clears the
path for sale to an incumbent. In our view, Bharti is the most likely buyer.
Impact
 The wait for Qualcomm is over. The grant of license was on hold due to a
technicality. In the wake of the 2G investigation, government authorities are
doing detailed due diligence before taking any decision. This would ensure
that there are no allegations of favourable treatment for any individual.
 Why would Qualcomm sell? In a 2010 press release, Qualcomm mentioned
that the company “has a history of participating in spectrum auctions to
expedite commercialisation of new wireless technologies. By participating in
India's BWA spectrum auction, Qualcomm can foster the accelerated
deployment of TD-LTE”. Prior to India, the company had similarly purchased
spectrum in multiple countries- e.g. the US (LTE) and Australia (3G). The
intention was clear through the sale to AT&T in the US and Optus in Australia.
 Purpose served in India: Based on recent news articles, it is now
increasingly clear that TD-LTE will emerge as the standard in India - leaving
WiMax behind. In fact, news reports suggest that Bharti has already identified
vendors for deployment of BWA (TD-LTE) in the circles where it already holds
spectrum. Qualcomm (which holds a 74% stake in the entity which holds the
spectrum) may therefore feel comfortable exiting at this stage. Qualcomm‟s
partner Tulip Telecom (13% stake) may also sell out. This may help the
company fund its growth plans and upcoming FCCB conversion (in 2012).
 Potential buyers- Bharti most likely: For the incumbent #1 Bharti, buying
the spectrum makes perfect sense from a five-year perspective. We believe
Bharti would like to maintain leadership in the next generation of wireless
technology – especially in Mumbai and Delhi. This would also help position
against new entrant Reliance Industries (RIL). RIL holds BWA licenses in all
22 circles and we expect it to acquire an existing operator to expand services
to 2G and 3G. The 20MHz spectrum would also become more valuable if
regulations evolve over the next three years and the „Next Generation Unified
License‟ is introduced. Importantly, Bharti has the ability to pay - we expect it
to generate free cash flow of over US$1bn every year.
 We believe that other incumbents (Idea/ Vodafone) may be interested but
their balance sheets may not support this. We do not rule out the possibility
that another player (Augere) may be interested in buying the smaller circles
(Kerala and Haryana). Since the spectrum in the four circles is held in a single
Qualcomm subsidiary, the structuring of such a deal may be tough.
Outlook
 We think the grant of license will lead to a sell out by Qualcomm to a strong
incumbent such as Bharti. We expect operational rollout by middle of CY2012.

Mutual fund investors find the going tough ::Business Line

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The ‘fill it, shut it, forget it' advice — made famous in an advertising campaign by erstwhile Hero Honda to emphasise the fuel efficiency of its bike — doesn't seem to work for the mutual fund investors any longer.

Prolonged bearishness and the frequent volatility in the capital market appear to have made long-term investment planning using mutual funds difficult as no investment theme appears to be delivering consistently.

An analysis of the data of top-five mutual funds — provided by the fundsupermart.co.in web site — over one, three, five and ten years is revealing in that no specific theme or fund has consistently figured on the top-five list as on October 30, 2011.

In the one-year category, ICICI Prudential FMCG fund with an annualised return of 17.72 per cent comes on top, followed by Canara Robeco Indigo (16.35 per cent). The others are DSP BlackRock's World Energy, World Gold Funds and AIG World Gold with returns ranging from 15.71 per cent to 12.88 per cent.

In the three-year category, Reliance's Pharma Fund comes on top with a 49.55 per cent return. AIG World Gold is second with 47.83 per cent. DSP BlackRock World Gold Fund, ICICI Prudential Discovery and Mirae Asset India Opportunities Fund make the rest with returns ranging from 47.06 per cent to 41.17 per cent.

Of these, AIG World Gold and DSP BlackRock World Gold funds figure in one-year and three-year lists, because of the sustained rally the yellow metal has witnessed.

IDFC Premier Equity Fund is on top of the five-year toppers list with a return of 23.04 per cent. Reliance has Pharma and Banking funds (growth and bonus options) while UTI has Dividend Yield Fund.

The 10-year performance chart shows how much the mutual fund space has changed in recent years. The five toppers over 10 years are Reliance Growth (37.54 per cent return) and Vision (33.99 per cent) funds, Franklin India Prima Fund (31.7 per cent), HDFC Equity Fund (31.59 per cent) and HDFC Top 200 Fund (31.58 per cent). But none of them are on the top-five list over five-, three- or one-year periods.

This could be bewildering for a lay investor because funds' performances vary depending on market cycles; and not all investors have the expertise to constantly churn their portfolios.

Reliance Vision and Reliance Growth have given -4.9 per cent and -9.12 per cent return over one year as on July 29, 2011, on SIP investments, according to latest data available with the fund's Web site..

Performances of HDFC Mutual Fund's two top equity schemes — Top 200 and Equity — are equally revealing. While Equity Fund's one-year SIP has given an annualised return of -23.54 per cent, the return over three years is 16.36 per cent and over five years is 12.47 per cent. The Top 200 Fund SIP's return over one year is -21.60 per cent, over three years 13.07 per cent and five years is 11.41 per cent.

The fact the MF industry has lost nearly 6 lakh equity folios in the first six months of the current financial year is a reflection of the investors' predicament.

Crompton Greaves - Sep-q well below 'low' expectations: JPMorgan,

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CG reported consol PAT of Rs1.17bn (down ~45% YoY), well below our and
street est. of ~Rs1.44bn (implying 32% de-growth). Reported topline of
Rs27.1bn (up 12.8%) was marginally ahead of our estimate (Rs26.8bn),
however margins fell over 550bps to 8.4%, ~100bps below estimates.
Operating income de-grew 32% YoY. Higher depreciation and tax rate
(28.1% vs. 27% est.) contributed to the bottom-line disappointment. CG was
down over 14% post results. Entering into Sep-q results we note that our
current FY13 EPS est. of Rs11.8 is 15% below Bloomberg consensus.
 Standalone revenues practically flat. CG reported standalone revenue of
Rs14.5bn, up only 0.5% YoY. The domestic power segment revenues (and
exports out of India) were down 7% YoY. For a consecutive quarter
consumer segment revenue grew by low single digits (3.6% YoY). At the
consolidated level revenue was in-line on account of exceptionally high
growth in overseas subsidiary revenue (31.6% YoY) and industry segment
(29% YoY vs. our est. of 23% growth). The favorable INR/EUR movement
appears to have contributed to overseas power segment topline growth, in our
view.
 Sep-q margins down 550bps. Margin disappointment (~100bps) was led by
higher RM (up 630bps), especially so in case of overseas subsidiaries (EBIT
margin of 2.3%). Both consumer and industry segment reported a decline of
150-250bps in EBIT margins on a QoQ basis.
 Analyst meet tomorrow at 10:15am to be addressed by Mr. Demortier
(MD), a novelty. There appears to be a departure from the norm of doing
conference calls post results. We expect to get more clarity on order inflows,
growth and margin outlook for FY13, where we see investor focus shifting.
 Maintain UW, Mar-12 DCF based PT of Rs125. The promoter had bought
0.5% stake from open market in Sep-q which had supported brief rally in
stock ahead of results, in our view. Pick up in order inflows and management
commentary tomorrow is a potential upside risk.

Jagran Prakashan: In-line 2QFY12:Kotak Sec,

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Jagran Prakashan (JAGP)
Media
In-line 2QFY12. JAGP reported weak 2QFY12 EBITDA of Rs794 mn (-13% yoy), in line
with expectations. Surprisingly, reported 2QFY12 PAT of Rs461 mn (-17% yoy) was also
largely in line despite (1) Rs135 mn forex losses (buyers credit, un-hedged ECBs) given
(2) ~Rs105 mn FMP interest/profit income; JAGP has well-defended its defensive
characteristic in a challenging environment despite renewed investments. Retain BUY
with FV of Rs160 (unchanged) led by robust leadership position in UP market, attractive
valuations (13X FY2013E) and high dividend yield (~3.3% FY2011).

DB Corp- Q2FY12: Ad Growth Holding Up Well, Raw Materials, New Edition Losses Pare Profit Growth : JPMorgan,

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DBCL 2Q earnings declined 39%YOY - while losses in the new editions were inline
with our expectations, higher newsprint costs and higher interest were the key
negative surprises. Advertising growth held up well, up 16% yoy, despite sharp
slowdown in national advertising. DBCL is looking to consolidate its new
editions, with no new launches planned in 2HFY12.
 Local markets help sustain advertising growth. 16% ad growth in 2Q is
driven largely by local retail markets (20%+ growth), while national ad
continue to remain sluggish (<10%). Management indicated that national
advertising remains muted despite the onset of festive season, with large MNCs
cutting down on ad spends. While management has a cautious outlook, they
indicated that DBCL should be able to sustain ad growth rates similar to 2Q.
 New launches ramping up well, consolidation ahead. New editions launched
in 4 cities of Maharashtra are scaling up well and DBCL expect to complete the
Maharashtra roll out by end 2012. Entry into Bihar has been put on hold owing
to uncertain growth environment and management will re-assess the decision in
Mar 12. Over the next 2 quarters, management is looking to consolidate
operations in Maharashtra, with new edition launches planned only for FY13E.
 Non-print, radio faring well with 2Q top-line growth of 29% YoY and
EBITDA growth of 198% YoY. Digital business crossed more than 100MM
page views per month in September helped by expanded presence through
mobile platforms. Management see significant synergies between the print and
non print, largely from advertising sales.
 Q2FY12 result highlights. Revenues up 16% YoY driven by ad revenues
(+16% YoY), circulation (+13% YoY) and Radio (+29% YoY). EBITDA
margins declined 960bps YoY, with new edition losses accounting for 650bps of
the decline. Net profits declined 39% YoY pared by Rs58.2MM MTM FX loss.
 Maintain OW. We cut FY12/13E EPS estimates by 15%/9% factoring in higher
newsprint costs and higher losses for new launches. We cut our PT to Rs280,
rolled forward to Sep-12 and based on 18x Sep13E P/E. DBCL has managed to
sustain strong ad-growth in a challenging environment and its successful
expansion track record gives us confidence on its plans in Maharashtra. Key
risks include rising competitive intensity, failure to scale up in new markets,
increase in newsprint costs and further slowdown in growth.

IDEA: Modest miss; interesting volume/pricing dynamics: Kotak Sec,

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IDEA (IDEA)
Telecom
Modest miss; interesting volume/pricing dynamics. Idea’s 2QFY12 revenues and
EBITDA missed our estimates by 0.5% and 1.7%, respectively – broadly in line. Earnings
report threw some interesting surprises on sequential movement in volume and pricing.
Sequential minutes decline of 2.2% qoq, despite expected seasonality, was a surprise
and so was the 4%+ qoq RPM uptick. We expect sustained pricing improvement for
some time – this should ensure robust revenue growth even as voice volume growth
slows down. Associated margin uptick is likely to drive strong EBITDA growth for the
next couple of years. We retain ADD with an unchanged target price of Rs115/share.

Godrej Properties- Muted 2QFY12 results. Debt increases sharply on new project additions:: JPMorgan

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Godrej Properties (GPL) reported 2Q earnings of Rs195M, marginally below
our estimates due to lower than expected revenues. Gross margins (at 23%)
were also subdued due to adverse sales mix; however higher other operating
income (development fee for Nagpur project) provided an offset. On
operational front, pre-sales were down 8% Q/Q due to delay in new launches.
While Sep-Q has been an eventful quarter in terms of new project additions
(8msf added, Jet BKC & Vikhroli agreement signed); we believe these plans
call for a sizeable scale up relative to GPL’s current execution/sales run rate
(~0.6msf). Advances for new projects has resulted in net debt increase of
Rs2.2B during the Q to Rs11.5B (Net D/E- 1.2x, highest in RE sector), which
is expected to increase further over 2H on conclusion of BKC deal (~Rs5B).
 Operational performance has been muted –2Q new bookings at Rs2.1B,
though improved by 250% Y/Y from a low base, were down 8% Q/Q.
Overall 1H bookings at Rs4.5B are tracking below expectations due to
delay in new launches. Work completion at 0.6msf albeit improved Q/Q.
 Development plan revised for Ahmadabad project, reducing the area to
24msf from 40msf. This was primarily due to change in government policy
& GPL’s strategy to minimize commercial construction (given high capex).
Management commentary was fairly cautious on office space outlook given
weak demand in tier 2 cities. While downward area revisions are significant,
overall project is still sizeable relative to GPL’s current sales run rate.
 Vikhroli deal economics- GPL will receive 10% of revenues; while
corresponding cost for sales & marketing would not be more than 2% as per
the company (~80% margin). Management was fairly positive on the
Vikhroli opportunity and its potential value accretion for GPL, however we
believe that overall economics would have been better off as a JDA partner
(which the street was expecting) rather than as development manager.
 Equity raising in the offing- GPL’s board approved equity raising plan of
upto Rs7.5B. Equity dilution risk is imminent, in our view, given co’s high
leverage on the back of aggressive project additions done over last year and
incremental funding requirement to secure key assets (BKC project).
 Estimate changes– Our Sep-11 PT is revised to Rs570 (vs. Rs605 earlier)
primarily as we factor in new economics for Vikhroli & BKC project. Our
booking assumptions are also lowered by ~10% due to delayed launches.

Piramal Healthcare - Muted Margin::Macquarie Research,

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Piramal Healthcare
Muted Margin
Event
 Piramal Healthcare (PIHC) announced its 2Q FY12 numbers, with net sales at
Rs4.8bn (up36 % YoY for continuing business) and PAT of Rs524m, boosted
by Rs309m investment income and Rs1bn of forex gain. EBITDA margin
declined further to -4.8% for 2Q (from 1.6% in 1Q FY12). The result was
below our estimates.
 PIHC has now corrected ~23% (underperformed BSE healthcare index by ~18%)
since 9 May 2011 (see our flyer, Piramal Healthcare – Changing risk profile), and
the stock is now trading closer to our TP. We upgrade PIHC to Neutral from
Underperform and maintain our TP of Rs360. However, we do acknowledge that
there could be further downside on value-destructive uses of cash.
Impact
 Margins muted – PLSL consolidation to add further pressure: EBITDA
margin for the quarter was -4.8%. The margin declined on account of higher
material cost, higher staff cost (one-off performance pay) and higher
investments in the OTC business. The transfer of PLSL's NCE unit into PIHC
in 2H may increase annual expenses by ~Rs1.5bn, affecting margins. The
PLSL demerger is expected to happen by the end of 3Q FY12.
 Guidance for FY12 for pharma businesses: Management guided for 20%
growth in revenue and an EBITDA margin of 4–5% for FY12. For 1H FY12
revenue grew by ~30%. This implies growth of ~10% YoY in 2H FY12.
 CRAMS (~63% of top line): Revenues grew by 32% YoY to Rs3bn in 2Q
FY12. Management continues to guide for strong traction in this business.
 Critical Care (~19% of top line): Revenues grew 43% YoY to Rs916m in 2Q
FY12. The crisis in Middle East is now resolved. PIHC has got Sevoflurane
registration approval for Europe, and sales should start by end-FY12.
 OTC & Ophthalmology (~12% of top line): This business reported net sales
of Rs571m (up 59% YoY). PIHC is making a major investment in
advertisement.
 Cash position of PIHC: Recently PIHC acquired a 5.5% stake in Vodafone
Essar Limited (VEL) for a cash consideration of US$640m. Currently, PIHC
has ~Rs7.4bn of cash and cash receivables from Abbott of Rs56bn.
Earnings and target price revision
 Upgrading to Neutral from Underperform. No change to estimates or TP.
Price catalyst
 12-month price target: Rs360.00 based on a Sum of Parts methodology.
 Catalyst: Value-destructive use of cash.
Action and recommendation
 We upgrade to Neutral from Underperform and maintain a TP of Rs360. We
value cash at a 50% discount (@ Rs275/sh) and the remaining part of the
business at Rs85/sh (at 15x FY13E EBITDA of Rs990m).

Hero Motocorp-2QFY12 Review: While operating margins surprise, we expect growth rates to moderate ::JPMorgan,

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 Hero Motocorp reported 2Q PAT at Rs.6B (+19% yoy), which was above
street estimates. The variance was driven by improved profitability given a -
220bp decline in the raw material cost ratio (due to price hikes taken in the
month of June as well as moderation in commodity prices) and a -270bp
yoy decline in the tax payout ratio. However, this was partially offset by
increase in the other expenses (ex of royalty charges), which have risen to
8.7% (+70bp qoq) due to higher branding / advertising expenses - post the
change in corporate identity. Further, the OEM incurred higher royalty
expenses (Rs.270m) due to the depreciation of the INR vs. the JPY.
 Conference call takeaways: Volume guidance: Management has guided
for growth of 15% yoy (vs.19% YTD) in two wheelers over FY12, driven
by rural demand. Hero Motocorp has launched ‘Impulse’ an off road bike
under the new brand name in this quarter. The OEM is de-bottlenecking
capacities from its existing plants by c.10%. Margin guidance:
Management has guided for margins to stabilise/improve from hereon,
given that commodity prices are moderating. While the company is
unhedged for its yen exposure, they do not expect any further deterioration
of the INR going forward. On Export markets: Management has identified
Latin America, Africa and South Asia as key markets and they are currently
identifying local distributors in these countries. Capex guidance: The
company has revised lower its capex guidance for FY12E to Rs6Bn due to
delays in commissioning of the fourth plant. They have incurred a capex
spend of Rs~3.25Bn YTD.
Our View: We believe that Hero Motocorp's growth over 2H will
moderate given a demanding base effect as well as easing industry
growth. Further, as Honda ramps up capacity, we expect competitive
intensity to increase over the year. We are raising our estimates for
FY12-13E by c.5.5% to factor in the 2Q results. We are rolling forward
our Price Target to Mar’12 and set a revised target price of Rs.1,810
based on a PE multiple of 13.5x (in line with our earlier valuation
methodology). Key Risks on the upside: Higher than expected industry
growth, lower than expected build up in competitive intensity.

Axis Bank: NIM expansion providing comfort on rising slippages: Kotak Sec,

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Axis Bank (AXSB)
Banks/Financial Institutions
NIM expansion providing comfort on rising slippages. Axis Bank reported a strong
quarter driven by healthy NIM expansion. While high NIMs provide near-term comfort,
we believe that the bank will face pressure on slowing fee income and rising loan-loss
provisions over the next few quarters. We revise our price target to `1,500 (from
`1,700) primarily to factor higher provisions, and dilution on acquisition of Enam
business and increase in cost of equity. Improvement in the business environment will
act as a key trigger for the stock while higher NIMs can provide earnings comfort on
rising slippages. Retain BUY.

Larsen & Toubro: Weak inflows, margin & wcap as slowdown & competition bite; remain cautious: Kotak Sec,

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Larsen & Toubro (LT)
Industrials
Weak inflows, margin & wcap as slowdown & competition bite; remain cautious.
L&T reflected weak business conditions with reduction in (1) order guidance (5% from
15-20% earlier - implied 2HFY12E growth of 18% may also be a tall task, (2) EBITDA
margin and (3) higher working capital & debt. We remain cautious as (1) cycle remains
weak, (2) competition has no signs of easing up and (3) in L&T’s long execution cycle
business weakness may linger and deepen more. Revise std. estimates (TP Rs1,425 from
Rs1,625) to Rs68 and Rs72.4 from Rs69 and Rs77 for FY2012E and FY2013E respectively.

Copper mine supply still struggling  Macquarie Research,

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Copper mine supply still struggling
 While financial markets focus on the potential for copper demand to fall as
China’s economic growth slows and the eurozone debt crisis continues to cast
a shadow over the outlook for the global economy, it may be forgotten that
world’s copper miners are still struggling to supply the market.
Latest news
 “Down, down, deeper and down!” These words, once sung by the rock band
Status Quo, sum up well the recent mood and direction in base metals markets.
Prices took another tumble on Thursday, with copper crashing 6.6% to close at
$6,722/t, while zinc (down 5.4% on the day) and aluminium (down 4.5%)
broke down below critical technical support levels. Tin fared relatively well,
but still fell 3.3%. Precious metals prices also fell, with gold giving up 2.0%,
silver sliding by 3.7% and palladium plunging by 4.6% to close below $595/t.oz.
Meanwhile, spot iron ore prices continue to sink and are now well below
$150/t CIF China. Prices are under pressure across the board from worries
over slowing growth in China and the eurozone debt crisis.
 Financial markets may fear the worst for metals markets, but physical market
price signals remain more constructive. Shanghai copper premiums remain
high, with latest quotes at $115-135/t CIF, from $115-145/t a week ago, and
another 15,000t of LME copper stocks were cancelled in Singapore on
Wednesday. However, European aluminium premiums are coming under
some softening as some of the carry trades come under pressure.
 The US Federal Reserve Bank of Philadelphia’s general economic index
rose to 8.7 from minus 17.5 in September, the biggest one-month rebound in
31 years. The weak reading a month ago contributed significantly to the
market sell-off seen at that time.
 Brazil's local media has reported that the proposal for the country's
new mining code to be submitted to congress before the end of 2012
plans to double the royalty rates on iron ore fines to 4% but the royalty
rate for pellets will remain unchanged at 2% in an effort to encourage
more value-add mineral processing within the country. As of yet, there
is no timetable for the introduction of the new royalty system.
 Even within Europe's ailing steel industry, the differences between
different product markets are highly visible from recent company releases.
Finland's Rautaruukki, a flat steel producer with significant exposure to the
construction sector, operated at only 80% of its total capacity in Q3 2011,
producing just 392,000t, with net sales down 15% QoQ. Meanwhile,
strong energy markets led French seamless pipe manufacturer Vallourec,
a world leader in its sector, to operate at 95% of capacity, helped by the
fact that a large part of its sales are made outside of Europe.
 Coal prices in Qinhuangdao have risen recently and are now reportedly
trading at ~RMB860/t (basis 5,500 kcal/kg), compared with previous lows of
RMB825/t, but it is thought that this may already be reflected in prices in
Guangzhou. Chinese thermal coal demand has been good, with coal fired
power generation rising by 21% YoY in September, while hydro-power
generation fell by 25% on the same comparison. However, supplies of
seaborne thermal coal available for import into China have been very
strong, which may lead to some pressure on index prices in the short term
and paper markets are already seeing a pullback in API2 versus API4.

Macquarie Agri View La Niña’s impact on South American grain & oilseeds ::Macquarie Research,

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Macquarie Agri View
La Niña’s impact on South American
grain & oilseeds
Feature article
 We highlight in this report our current view of the building La Niña weather
phenomena and discuss the impacts this event could have on South
American corn and soybean production. Current expectations are of a mild to
moderate La Niña (-0.5 < SST anomaly < -1.0) during Q4 2011. In sum the
likely impact of this weather event will be for Brazilian soybean yields to once
again outperform trend and conversely Argentine corn yields will be likely to
underperform trend. The implication for the global soybean market fits in with
our current thesis that soybeans will remain the laggard of the grain and
oilseed complex continuing to trade at a historically tight ratio to corn prices.
The signs are more worrying for the corn market as the world is increasingly
reliant on EX-US corn supplies due to the restrictions in US production. The
projected drop in Argentine yields will see a shift lower in their export
potential; this implies corn supplies from the Ukraine and Brazil will be
increasingly important. Looking at the historical impacts of a mild to moderate
La Niña on the South American crops, we see the typical yield
outperformance for Brazilian soybeans could lead to a production of 77.3mt
and the typical yield underperformance for Argentine corn could lead
production down to 25mT. In summary this analysis shows that weather risk
still remains a pertinent issue for production in the 11/12 season and the
continued strengthening of the La Niña could further shake the world’s grain
and oilseed markets.

Hexaware Technologies- Firing on all cylinders, raise TP:Macquarie Research,

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Hexaware Technologies
Firing on all cylinders, raise TP
Event
 We raise our TP to Rs103 (vs Rs92 earlier) post solid 3Q CY11 results.
Offshore effort shifts, cost efficiencies on SG&A and currency depreciation
have helped the company to post margin surprise. We now have more
comfort on the sustainability of margins and raise our margin forecast by
150bp for CY12 and CY13, leading to an increased TP. Reiterate OP.
Impact
 Conference call takeaways. (1) The CEO indicated initial discussions with 8
of the top 10 clients of the company indicated that IT budgets are going to flat
to slightly up next year; (2) US$100m deal win announced earlier in the year
has reached steady state. We think this can aid future cost rationalisation; (3)
Hexaware is targeting 800-1000 fresher induction in CY12 (vs. 800 in CY11).
 Billing, Forex & Costs rationalization pumps margins. The key moving
parts for EBIT margin improvement of 350bps this quarter are: +170bps due
to FX, +75bp due to effort/offshore movement, +115bps from billing, -140bps
from wage hikes and fresh hiring, +130bps from SG&A rationalization.
 CY11 revenue growth guidance raised again, now at 32% YoY growth.
Our positive view on the name is premised on strong execution and healthy
deal wins. The performance this quarter and positive 4Q outlook reinforce our
investment view. Growth momentum is the most potent margin lever for the
company. This quarter’s performance, coupled with mgmt commentary on the
preliminary 2012 outlook, is comforting for the margin outlook.
 Forex hedges at good levels for CY12-13. The company has hedges worth
US$177m at a ~INR/USD exchange rate of ~Rs48. This is close to the
prevailing rate of ~Rs49. In case the currency appreciates, the company
should have a forex gain in the coming quarters.
Earnings and target price revision
 We retain our street-high revenue forecast for the company and are raising
our margin assumption. Cost rationalizations result in 11% rise in our
CY11E/12E EPS. ( For details see Fig 1-3) As a result, our PER-based target
price moves to Rs103 (vs Rs92 earlier). For details on changes to estimates,
see Fig 4.
Price catalyst
 12-month price target: Rs103.00 based on a PER methodology.
 Catalyst: Large deal wins
Action and recommendation
 Reiterate OP.

Cairn India Left searching for a positive trigger::Macquarie Research,

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Cairn India
Left searching for a positive trigger
Event
􀂃 Cairn India (CAIR) reported an adjusted Q2FY12 PAT of Rs15.9bn (flat YoY,
down 42% QoQ). Its reported profit of Rs7.6bn was due to the one-time hit of
royalties on account of Rajasthan production till Q1FY12 to the tune of
US$336mn, partially offset by forex gains of Rs5.3bn. Lower (recurring)
profitability was due to royalties and start of profit sharing with Government.
We maintain our TP of Rs260, and downgrade the stock from Neutral to
Underperform, as it has rallied by 11% in the last two weeks.
Impact
􀂃 Vedanta takeover a done deal, but positives yet to materialise: With Cairn
India shareholders (Cairn Plc and Vedanta group hold 80%+) accepting the
value-eroding preconditions of making Rajasthan block royalty and cess costrecoverable
through a simple majority ballot (pending an NOC for sale by the
ONGC board), uncertainty surrounding the firm has been replaced with a
certainty of lower profitability, and the expectation of expedited permissions
(by GoI/ONGC) to ramp up production. Media reports state that the new
ONGC chairman has affirmed support for increasing production (25 kbpd from
Mangala possible immediately, 40kbpd from Bhagyam by end CY11).
􀂃 20% tranche of profit share reduces EBITDA margin by 7% vs Q1FY12
Royalties being made cost-recoverable has hit profitability by 15% on a
recurring basis, according to the management. Also, the Barmer field has hit
the 20% tranche of profit share in Aug-11, curtailing profit margin further.
􀂃 Mangala oil realizations down 2% QoQ; 10% discount to Brent
maintained: Rajasthan gross realizations fell to US$102.8/bbl. Rajasthan
total opex maintained at US$2.5/bb), which is still significantly below the
company’s long-term steady-state estimate of US$5/bbl.
􀂃 Pipeline capacity may be a near-term constraint, despite permissions:
The delivery pipeline (Mangala-Salaya-Bhogat) needs to be augmented
beyond its existing capacity of 175 kbpd to allow for Mangala and Bhagyam
fields to produce at full throttle, and the same is expected to materialise not
before CY12-end, although there may be some capacity optimization.
Earnings and target price revision
􀂃 PAT estimates increased by 1-2% due to INR depreciation.
Price catalyst
􀂃 12-month price target: Rs260.00 based on a Sum of Parts methodology.
􀂃 Catalyst: GoI permissions for ramp-up; Clarity on pipeline augmentation
Action and recommendation
􀂃 CAIR is trading at an expensive US$48/bbl of EV/1P reserves (due to low 1P)
vs global mean of US$18/bbl. Approvals of ramp-up from Mangala/FDP
changes for commissioning of Bhagyam and Aishwarya could be soon, but
the stock is already reflecting the possible volume growth as well as a high
long-term Brent crude price of ~US$100/bbl, in our view. A drop in profitability
due to royalty and profit petroleum (sharing with the govt) could take the
sheen of the stock, especially if crude price declines, as is our house view.

Sterlite Industries- Steep increase in dividend from zinc sub key positive::JPMorgan

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 Steep increase in dividend payout from zinc sub (HZ IN, not rated)
key positive: While the zinc sub delivered results broadly in line with
estimates, with EBITDA at Rs14.6bn vs. JPMe of Rs13.9bn, we believe
the biggest positive to come out of the results was the steep increase in
dividend payout. The ~65% STLT-owned sub, Hindustan Zinc, declared
an interim dividend of Rs1.5/share on H1 EPS of Rs6.72/share, implying
a payout of ~22% on H1 PAT. This translates into an inflow of Rs4.1bn
for STLT in H1. Payout ratio including the dividend tax stood at 7% and
10% in FY10/11.
 The first tentative step toward addressing the key issue of
'fungability of cash from subs': One of the key investor pushbacks on
STLT has been the perceived lack of fungability of cash at its subs,
particularly the zinc sub, where net cash at the end of the Sept quarter
stood at Rs162bn (~$3.31bn). As we had highlighted in our recent Note
on STLT (Grade A zinc assets provide earnings support; market
discounting severe stress from ally/power investments) any move to
address the fungability of cash would be an important step.
Understandably, a large part of today's conference call of HZ was on
dividend payout policy going into the future. Management did not give
any numbers on expected payout ratios. Assuming that the 22% payout
ratio is maintained for both FY12-13 on our estimates would result in a
cash inflow for STLT of Rs8.7/9.7bn for the respective years. We have
argued that growth opportunities in zinc in India have peaked out, and
thus cash deployment inside India would be difficult. Given the steady
decline in FII holdings in STLT, we believe positive news flow such as
the above could likely lead to strong stock upmoves. The next big
timelines are in January, when the final hearing for bauxite would take
place at the Supreme Court.
 Results update: The modestly higher EBITDA was primarily due to
lower CoP (CoP without royalty was down 3% q/q). Reported PAT for
the quarter was Rs13.4bn vs. JPMe at Rs13.3bn. Other income was 5%
higher than our estimates but the tax rate was also higher (19.2% vs. 17%
in 1QFY12) due to advance taxes paid in the quarter

Indraprastha Gas 2QFY12 - Below expectations, supply visibility a concern ::JPMorgan

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IGL 2QFY12 earnings of Rs772m (+16.5%y/y) were below our and
consensus expectations, impacted by lower-than-expected margins. The
rupee depreciation late in 2QFY12 and higher LNG in the supply mix led
to the margin disappointment. While IGL continues to demonstrate pricing
power, we are cautious on the stock on account of supply constraints and
potential impact of higher prices on demand growth.
 2QFY12 volume growth steady. IGL volume growth of 23% was aided
by strong 14% growth in CNG volumes (on account of private car
conversions and strong growth in DTC demand as new buses get added)
and a 62% growth in PNG. PNG volume growth during the quarter was
impacted by customer shutdowns and management believes there is no
price impact on demand as of yet.
 Pricing power remains a key positive. Rupee depreciation late in
2QFY12 and higher LNG in supply mix led to the margin
disappointment. IGL has taken price hikes in early October (a Rs2/kg
hike in CNG), which should help protect margins during the current
quarter.
 Supply visibility is a concern. IGL is hopeful of tying in further term
LNG volumes from parent GAIL; but given current volume growth
trends, IGL would need to depend on spot LNG for near-term growth.
Tying up of LT supplies would remove a key overhang on the stock.
 We stay cautious. IGL stock has corrected c.9% over the last month. We
continue to stay cautious on the stock on low supply visibility and
potential demand impact of high spot LNG prices on Industrial
conversions. Our DCF-based PT is Rs410 – a 10% correction in the
stock would turn us more constructive on IGL stock. Key risk to our
view is higher-than-expected volume growth.

What's Working in Asian Telecoms / Internet? "...and I know someday I will find the key...": Telcos = Earnings revisions; "There are no internet stocks" :: JPMorgan,

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 “Seems like I’m caught up in your trap again, Seems like I'll be wearing
the same old chains, Good will conquer Evil, and the truth will set me
free…and I know some day I will find the key…(Trapped, by Jimmy Cliff,
as sung by Bruce Springsteen)”. The performance gap between our Earnings
Momentum Telco portfolio and our Value Telco portfolio continues to gap out,
with the Earnings Momentum portfolio outperforming the Value portfolio by a
huge 72% YTD (Earnings Momentum portfolio +48%, Value as defined by P/E
-24%, P/BV even worse at -32.5%). We recommend investors don’t buy cheap
telcos…the key to telco outperformance is earnings revisions, in our view.
 What’s the market paying for YTD? Telcos = Earnings Momentum. The
region as a whole has more balanced drivers, with Quality, Earnings
Momentum, and Price Momentum all driving significant positive returns. Size
and Price Momentum have been the most positive drivers within the Internet
space, while Earnings Momentum and ROE have driven significant negative
Internet stock returns. Best Telco markets on Earnings Momentum are
Thailand and Japan (best YTD and best shorter term momentum), vs. Korea
and Indonesia. Best Telco stocks with short term earnings momentum are
TNZ, Softbank, ADVANC; Worst are LGU+, RCOM.
 Short Term: MTD the Asian region has traded largely on yield, beta, and
quality (investors seeking out high quality names with some level of trough
value (dividend) that have been beaten down in the market sell off). Telcos as
usual, trade differently, with beta actually driving negative performance (higher
beta Telcos outperformed during the market turn, and are now serving as
funding sources), while the normally strong drivers of Earnings Momentum and
Analyst Revisions showed negative returns (again, due to strong outperformance
during the sell off). We’d use this as an entry / short opportunity for high beta
Telcos with good earnings revisions that have underperformed lately – Top Pick
is China Unicom, best to avoids include LGU+.
 There are no Internet Stocks: Cross sector correlation in the Chinese internet
space is once again at 90%+, from 40% at the beginning of the year (please see
Figure 28). The sector is trading as one giant mass, rather than as single stocks.
This should create very large opportunities eventually, but we believe the most
important call to make in the Chinese Internet space is when stocks actually
become single fundamental stocks again. We’d be long Gaming (NTES, OW)
and short Advertising (SINA, N) once we can make this call.
 Please contact us for tools: We have an interactive factor exposure model
available as well as detailed files showing stock exposure to the factors
(included in this report as Appendices).