Tracking Promoter Pledging: What’s at Stake? :Morgan Stanley Research,

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Quick Comment: Per the SEBI regulations initiated in
Mar-09, promoters/founders of companies are required
to disclose the amount of stock they have pledged.
The following are our observations on the
disclosures made during the latest quarter:
What’s at Stake? During this quarter, 772 companies
disclosed pledges on their holdings. As at the end of
Sep-11, the total value of pledged stocks was
US$24.5bn versus US$34.3bn in Jun-11 (down 29%
QoQ). The fall was further magnified by the recent fall in
currency. In rupee terms, the total pledged value stood
at Rs1.2trn vs. Rs1.5trn in Jun-11 quarter (down 22%
QoQ). This pledged value as a % of the market cap of
stocks of these companies has fallen to its lowest level
since Mar-09 – at 9.8% (down 20bps QoQ). This
pledged value as a % of India’s market cap fell for the
three successive quarters to its lowest level since
Mar-09 – at 2%. Marked to market, as per previous day’s
close, the pledged value of shares was at US$23.9bn vs.
US$24.5bn at the end of the Sep quarter without
accounting for any subsequent changes that may have
happened to the number of shares pledged.
Assuming 50% margin, the bank credit to these
promoters at US$12.3 billion is 1.3% of outstanding
bank credit.
At the sector level, Technology saw the biggest fall in
share of pledging while Financials witnessed a pickup in
share during the quarter (see Exhibit 4).
As a percent of total pledges (in value terms), Consumer
Discretionary followed by Materials had the biggest
pledging by promoters. As a percent of market cap,
pledging is highest for Utilities and Financials. Materials
followed by Consumer Discretionary continue to have
the most widespread pledging by promoters.

Buy SUN TV NETWORK ; TARGET PRICE: RS.391 :: Kotak Sec

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SUN TV NETWORK
PRICE: RS.288 RECOMMENDATION: BUY
TARGET PRICE: RS.391 FY13E P/E: 10.4X
q Sun TV reported revenues Rs 4513 mn, and PAT Rs 1800 mn for 2QFY12.
Results were above our expectations and in-line with consensus estimates.
Revenue growth came in at 6%, on account of soft growth in
both advertising and subscription revenues. Advertising revenues have
been hit by general economic slowdown, as well as uncertainty regarding
Sun TV viewership and rating, in our view. Subscription revenues
have been impacted by loss of cable revenues in Tamil Nadu, as also
weakness in DTH revenues, on account of reduced caps on maximum DTH
tariffs.
q 2QFY12 has been one of the most challenging quarters for Sun TV Network,
on account of uncertainty that the launch of Arasu cable has
caused on the company's Tamil operations. This is perhaps the reason
behind the strain on Sun TV's working capital in the quarter. Given that
Sun TV has withstood the storm and continues to be the clear leader in
Tamil GEC market, we believe the strain will ease over time, as guided by
the management.
q The company has successfully launched Kochu TV - a Malayalam kids'
channel, which has gone on to become the third most watched channel
in Kerala within the quarter. Sun TV Network intends to launch other
new channels as well in the coming quarters. Negotiations with Arasu
Cable are on, and the management has indicated that analogue cable revenues
may revive in the coming quarters. Meanwhile, Sun TV's
viewership has risen back to normalcy (65% for Wk 43), indicating that
advertising revenues from Tamil Nadu are unlikely to be impacted by
launch of Arasu Cable.
q Sun TV continues to be among our preferred picks in the media space,
for we believe that the company's operations are among the strongest in
the business. Resolution of ongoing issues, relating with CBI enquiry
into the promoter/ relative, has potential to provide an outsized return
on Sun TV investment. We also believe that Sun TV, being the market
leader by far in three languages, is a prime candidate for benefit from
mandatory digitization.
q Valuations are attractive, at 13.0xFY12 PER, and dividend yield of 3.5%.
While Sun TV shall likely continue to see significant volatility on newsflow,
we believe the gap between CMP and our assessed fair value (DCFbased,
Rs 488) compensates the risk-neutral investor adequately. Including
discount of 20% for risk, we have a price target of Rs 391 for Sun TV
Network. Maintain BUY.
q Risks: 1/ Adverse news-flow regarding the company/ promoter on issues
currently under investigation by CBI, 2/ Competitive Risks, 3/ Macroeconomic
risks relating with adex growth.

Subdued TDR Sales; Free Cash Flow Remains Positive for HDIL: Nirmal Bang

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Subdued TDR Sales; Free Cash Flow Remains Positive
HDIL’s 2QFY12 profits were below our and consensus expectations by 29.7%
and 19.2% respectively on account of lower TDR (transfer of development rights)
volume, as it reported 0.27mn sq ft of TDR sales against our estimate of 0.50mn
sq ft. Delay in government approvals and a challenging macro environment hurt
new project launch/contracted sales and thereby TDR sales. We lower our
FY12E and FY13E profit estimates by 16.2% and 15.5%, respectively, to factor in
lower TDR sales and the delay in revenue booking from existing projects.
However, we believe the concerns are well factored in and the 46% correction in
stock price over the past four months versus 8% in the Sensex provides a good
buying opportunity, with the stock trading at 0.3x P/BV. We maintain our Buy
rating on the stock with a revised TP of Rs113 (Rs142 earlier).
Lower TDR sales dent profitability: HDIL reported revenue growth of 15.4% YoY
(down 13.9% QoQ), largely driven by FSI sales (Rs2.9bn) from its Guru Ashish
(Goregaon) project. The TDR market remained weak following the slowdown in new
project launch in Mumbai due to delay in approvals, resulting in a 57% QoQ decline in
TDR revenue (Rs700mn). HDIL sold 0.27mn sq ft of TDRs at Rs2,545/sq ft in 2QFY12
as against 0.65mn sq ft at Rs2,500/sq ft in 1QFY12. EBITDA margin was largely in line
with our expectation. The 1,543bps YoY drop in OPM is on account of the product mix
skewed towards FSI sales. Tax rate was 26.1% in 2QFY12 versus 15.3% in 2QFY11
because of higher tax paid on FSI sales, which attracted full tax rate as against MAT
rate for TDR sales. Hence, PAT declined 24.4% YoY to Rs1,486mn against our
estimate of Rs2,114mn and consensus estimate of Rs1,839mn.
Balance Sheet remains strong: HDIL’s net D/E ratio fell from 0.43x in FY11 to 0.40x
in 2QFY12, thanks to FSI sales. We expect net D/E ratio to go down further to 0.31x in
FY13E as HDIL mops up remaining Rs9bn of cash via FSI sales at Goregaon and
Andheri projects by March 2012, ongoing FSI sales at Vasai/Virar and sales generated
from new launches. Over the past three quarters, HDIL turned operating cash flow
positive and generated Rs4,198mn free operating cash flow in 1HFY12 as against Rs
22bn of negative free cash flow generated over FY09-11.
Outlook: We expect regulatory issues to get resolved in Mumbai when the
Maharashtra government comes out with its definitive FSI policy that will expedite the
approval process and thereby improve new launches. We expect HDIL’s competitive
pricing strategy to attract demand and thereby improve contracted sales. At the CMP,
HDIL trades at 3.5x P/E, 0.3x P/BV and at 43% discount to our one-year forward NAV.

Tata Steel: Weak international operations hurt performance :: Kotak Sec

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Tata Steel (TATA)
Metals & Mining
Weak international operations hurt performance. Tata Steel reported consolidated
EBITDA of Rs27.5 bn (-25.1% yoy), 15.5% lower than our estimate. Net income of
Rs2.1 bn declined 89.3% yoy and was 66.2% lower than our estimate. Miss on
earnings is primarily on the back of PBT loss of Rs12.3 bn in international operations.
Results have a lot of moving parts, clarity for which will emerge post earnings call on
11th November. Financial performance of Tata Steel may be muted in the near term but
is known and built in the stock price. Stock trades at attractive valuations. BUY

Anant Raj Industries - In line quarter ":Prabhudas Lilladher,

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􀂄 Results in‐line: The company reported revenues of Rs883m, YoY decline of
33.5% and a sequential increase of 6.9%. Margins were steady at 58% as
against 59% in 1Q FY12. PAT remained flat on a sequential basis at Rs346m
while the decline on a YoY basis stood at 28%. In terms of revenue breakup, the
Sector 91 Gurgaon project was the major contributor at 87% while the
Kapashera and Manesar project contributed the remaining.
􀂄 Sales during the quarter: Phase 1 of the ‘Neem Rana project’ in Rajasthan,
which consisted of 758 units, was launched this quarter, where it sold about
one-third of the area launched during the quarter and almost two-thirds till
date. However, revenue recognition for this project is expected to commence
from Q3 onwards. Sales at Sector-91, Gurgaon, remained stable with almost
two-thirds of the project being sold out.
􀂄 Launches going forward; The Company is looking at launched plots at its newly
acquired Sector 63 project in Gurgaon. Besides, it also has approvals in place for
its five villa project on Bhagwandas road in Delhi.
􀂄 Valuations: As per our estimates, ARIL’s NAV stands at Rs133. Our target price is
based on a 50% discount to the NAV. We maintain ‘Accumulate’, with a target
price of Rs66.

Buy HPCL:: Motilal oswal,

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HPCL reported EBITDA loss of INR29.4b for 2QFY12 v/s our expectation of an EBITDA of INR12.6b, primarily due to (1)
nil government compensation v/s our estimate of INR32b, (2) GRM of USD1.9/bbl, much lower than our estimate of
USD6.8/bbl, led by the June 2011 duty cut impact on crude inventory, and (3) forex loss of INR10b. The company
reported a net loss of INR33.6b v/s a net profit of INR21b in 2QFY11 and loss of INR30.8b in 1QFY12.
Net under-recovery sharing at 67% in 2QFY12, 44% in 1HFY12; model 4% in FY12
 Of the gross under-recovery of INR47b in 2QFY12, HPCL received INR15.6b from upstream as discounts on crude
purchases. However, the government did not pay any compensation during the quarter. The net subsidy burden was
INR31.2b in 2QFY12.
 For FY12, we model upstream share at 38.7%, government share at ~57% and OMCs' share at 4%. For FY13, we
model OMCs' share at 13%.
June 2011 duty cuts impact GRM
 GRM for the quarter was USD1.9/bbl (v/s our estimate of USD6.8/bbl) as against USD2.7/bbl in 2QFY11 and USD1.1/
bbl in 1QFY12. The lower than expected GRM was led by duty cuts effected by the government in June 2011, which
impacted HPCL's crude inventory.
 We estimate the impact of duty cut on the 2QFY12 reported GRM at ~USD1.2/bbl. Further, the large underperformance
v/s the regional benchmark Reuters Singapore GRM in recent quarters is due to the difference in product slate -
HPCL is a diesel-heavy refiner and cracks of diesel were down QoQ in 2QFY12.
Valuation and view
 We model Brent oil price of USD110/95/90/85/bbl in FY12/FY13/FY14/long-term in our estimates. Similar to earlier
years, government subsidy sharing is likely to be finalized towards the end of the year. In view of the likely ONGC
FPO, we expect the government to spell out a sustainable subsidy-sharing formula.
 To account for lower GRM performance in 2QFY12, we cut our FY12E EPS by 19% to INR30.6. The stock trades at
10.9x FY12E EPS of INR30.6 and 0.9x FY12E BV. Key things to watch (apart from subsidy sharing) are the start of
commercial production at Bhatinda Refinery at full utilization and GRM performance. Valuations are reasonable.
Maintain Buy.

Tata Sponge Iron; TP:INR440 Buy :: Motilal oswal,

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 Adjusted PAT for 2QFY12 declined 4% QoQ (6% YoY) to INR217m, below our estimate of INR224m on account of
lower sponge iron production. Sponge iron production was down 1% QoQ (30% YoY) to 71,000 tons, as iron ore
supply was impacted by local issues.
 Net sales grew 19% QoQ (down 1% YoY) to INR1.74b while realizations increased 23% QoQ to INR22,397/ton.
 EBITDA decreased 10% QoQ (13% YoY) to INR299m while EBITDA/ton declined 8% QoQ to INR4,206.
 Despite significantly lower production and sales volumes, strong sponge iron realizations are supporting both revenue
and margins. Current sponge iron prices are at a 3-year high in the domestic market. Mining ban in Karnataka and
regulatory rigor in the Barbil region has affected supply of iron ore to the industry.
 We expect sponge iron production to be significantly lower at 300kt (v/s 383kt in FY11) due to iron supply issues.
We have cut our FY12 volume estimate from 355kt to 300kt, reducing our FY12 EPS estimate by 4%.
 Radhikapur (East) coal block is on track. Coal production is likely to start in 2013.
 The stock trades at an attractive EV of 2.1x FY12E EBITDA and 5.6x FY12E EPS. Maintain Buy.

Hindustan Unilever; target Rs 340; Motilal oswal,

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Key takeaways from post results conference call
 Consumer demand remains strong, with no signs of downtrading so far; premiumization trend continues.
 HUVR has increased innovation in Personal Care and Foods. It has re-launched Lux soap and Vim Bar.
 21.8% sales growth in Soaps & Detergents has been driven by pricing. We estimate the pricing element at ~12% in
Detergents and at 9-10% in Soaps. The management indicated that increase in prices does not indicate any let up
in competitive intensity.
 2QFY12 has witnessed various innovations, modern trade activation, rural expansion and benefits of an early Diwali
which has boosted volume growth. HUVR has also reaped benefits of direct rural distribution expansion.
 HUVR’s ad spends have been flat in 2Q and declined 8% in 1HFY12. Though ad spends have been cut in Soaps &
Detergents, they are in line with the prevailing trends in the industry.
 Though input cost environment remains challenging, HUVR would be cautious in taking incremental price increases
– it would not like to lose market share as had happened in 2009.
Revising estimates by 5-8%; maintain Neutral: We are revising our FY12/FY13 EPS estimates by 5-8% to factor in
higher volume growth and margin expansion in Soaps & Detergents. While we expect HUVR to sustain high single digit
volume growth in the medium term, we hold our view of structural adjustment in Personal Care margins in the medium
term. We estimate 16.9% PAT CAGR over FY11-13 post 7.6% CAGR in the last three years. The stock trades at 33x
FY12E EPS of INR11.8 and 28.5x FY13E EPS of INR13.6. Maintain Neutral.

Buy Birla Corporation: TP: INR466: Motilal oswal,

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Birla Corp's 2QFY12 performance was below estimates, with EBITDA of INR316m (v/s est INR715m) and PAT of INR261m
(v/s est INR584m), impacted by lower volumes, higher costs and forex loss.
 Cement volumes grew just by 2% YoY (-7% QoQ) to 1.41mt (v/s est 1.45mt). Realizations declined by 6% QoQ
(+3% YoY) to INR3,213/ton (v/s est INR3,023/ton), benefitting from improvement in market mix. Net sales grew by
6% YoY (-8% QoQ) to INR5.2b (v/s est INR4.9b).
 EBITDA margins declined by 20.4pp QoQ (-970bp YoY) to 6.1% (v/s est 14.6%) and PAT de-grew by 77% QoQ (-
62% YoY) to INR261b.
 Cost/ton has increased by INR565/ton QoQ (+INR420/ton YoY, v/s est increase of INR200/ton QoQ), driven by higher
RM, energy cost and other expenses (due to Fx loss of INR138m).
 Its Rajasthan plant (~2mt capacity) operation are impacted w.e.f 20/August/2011 due to mining ban order within
10Kms of the Chittorgarh Fort. While its 2QFY12 volumes would have limited impact due to clinker inventory, prolong
ban would severely curtail its operation at Rajasthan plant. It has appealed the order and expects it to be heard in
Dec-11.
 The board has announced interim dividend of INR2.5/share.
 We are marginally downgrading our FY12 EPS by 1% for FY12 to INR50.2 and FY13 by 5% to INR55.2, to factor in
for higher energy cost and RM cost (due to mining issue at Rajasthan plant). The stock trades at 5.9x FY13 EPS,
4.1x EV/EBITDA and USD54/ton. Maintain Buy with target price of INR466 (5x FY13 EV/EBITDA).

Infra 2QFY2012 - Results Review ::Angel Broking

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Gloomy environment to prevail


Decent top-line growth + Lower EBITDAM/high interest cost = Bottom-line
decline: Most infrastructure players (10 companies chosen for this analysis)
witnessed decent yoy growth (average 17.3%) on the top-line front in 2QFY2012.
We had mentioned in our 1QFY2012 note that sluggish performance on the
execution front could be a worrying sign for C&EPC companies given the
headwinds faced by the sector, but 2QFY2012’s better-than-expected
performance on the top-line front has been heartening. EBITDAM for the quarter
broadly remained under pressure, owing to high commodity prices and
inflationary pressures. Consistent hike in repo rates by the RBI (in order to contain
inflation) accentuated the already high interest cost for companies in the sector.
On the earnings front, high interest cost (owing to a high interest rate regime and
increased debt levels) coupled with EBITDAM compression resulted in a decline in
the bottom line for most companies under our coverage.
Valuations continue to remain at abysmal levels; Lack of catalyst in sight +
Persistent headwinds = Subdued performance to continue: Stock prices of
infrastructure companies continued to take a beating on the bourses, bringing the
stocks to very attractive levels on the valuation screen, even on subdued earnings
estimates. However, lack of positive news flow from companies per se and
persistent headwinds faced by the industry – such as high interest rates, policy
inaction, slower-than-anticipated revival in industrial capex – led to
underperformance of infrastructure stocks on the bourses. Therefore, given no
visible signs of reversal of trends, we continue with our view that the performance
of the sector will remain subdued.
We prefer to remain selective: We believe that stock-specific approach would yield
higher returns given the disparity among these companies and changing
dynamics affecting them positively/negatively. Hence, in the current uncertain
times, we remain positive on companies having 1) a comfortable leverage
position (L&T and Sadbhav); 2) strong order book position (L&T and IVRCL);
3) undemanding valuations (IVRCL); 4) superior return ratios (L&T and Sadbhav);
and 5) less dependence on capital markets for raising equity for funding projects
(L&T and Sadbhav). Hence, we maintain L&T, IVRCL and Sadbhav as our top
picks in the C&EPC space and recommend IRB in the development space after its
recent fall, which has brought the stock to attractive levels.

Buy ANDHRA BANK ; TARGET PRICE: RS.148 :: Kotak Sec

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ANDHRA BANK
PRICE: RS.119 RECOMMENDATION: BUY
TARGET PRICE: RS.148 FY13 P/E: 4.0X; P/ABV: 0.9X
Q2FY12 results: Core earnings in line but asset quality disappointed.
q NII grew 21.4% in Q2FY12 mainly aided by strong growth in advances
(22.1% YoY) despite 9bps decline in NIM. However, net profit was subdued
(grew by only 4.3% YoY) mainly due to spike in provisions & contingencies
(118% YoY).
q Loan growth came at 22.1% during Q2FY12, mainly supported by strong
growth in MSME and retail segments. However, deposit growth was
relatively moderate at 20.2% during the same period, resulting into 120
bps improvement in C/D ratio to 78.9% at the end of Q2FY12.
q In absolute terms, gross NPA and net NPA spiked 68.9% (QoQ) and
222.1% (QoQ), respectively during Q2FY12, as bank has completed the
full transition to system based NPA recognition system. Its Provision Coverage
Ratio (PCR) has also come down to 61.7% at the end of Q2FY12,
providing little cushion against any future deterioration in the asset
quality.
q We are modeling earnings to grow 14.9% CAGR during FY11-13E, while
return profile is also expected to remain healthy (FY13E - RoA: 1.2%, RoE:
21.9%) during next two years. We are maintaining BUY rating on the
stock with revised TP of Rs.148 (Rs.167 earlier) based on 1.15x of its
FY13E adjusted book value.

PFC/REC: Operating performance remains strong :: Kotak Sec

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PFC/REC
India
Operating performance remains strong. The power finance companies (PFC and
REC) reported in-line performance. Reported earnings were distorted by MTM losses;
adjusted (core) earnings were up 15-16% yoy on the back of 24-26% loan growth.
NIM declined yoy but were stable/marginally up qoq; asset quality performance was
also stable. We tweak estimates for PFC; await more details from REC. Retain ratings
and price targets – PFC (TP: Rs225, BUY); REC (TP: Rs240, BUY).

Hold Reliance Communication; Target :Rs 84 ::ICICI Securities

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T r a f f i  c   g r o w s ;   s o   d o e s   A R PM …
Reliance Communications reported its Q2FY12 numbers that were slightly
below our expectations on the topline front. Revenues for the quarter
stood at | 4792.2 crore vs. our expectation of | 4854.1 crore, de-growing
1.2% QoQ, representing a seasonally weak quarter. The EBITDA for the
quarter stood at | 1357.1 crore against our expectation of | 1492.8 crore,
de-growing 10.2% QoQ owing to higher ad expenses. The EBITDA
margin for the quarter stood at 28.3% falling 284 bps QoQ. However, on
the bottomline front, the company reported better-than-expected
numbers. Net profit for the quarter stood at | 252.1 crore vs. our
expectation of | 199.9 crore primarily due to higher other income, which
stood at | 248 crore against our expectation of | 100 crore.
Highlights of the quarter
Even in a seasonally weak quarter, RCom managed to grow the traffic on
its network unlike its peers. Traffic on network improved by1.6% to 98.9
billion minutes. ARPM also improved in this quarter to stand at 45 paisa
as compared to 44 paisa in Q1FY12. ARPU and MoU, however, declined
QoQ from | 103 and 233 to | 101 and 227, respectively. The company
added 3.8 million wireless subscribers in this quarter.
V a l u a t i o n
In spite of being a seasonally weak quarter, the company registered a
growth in both traffic as well as ARPM. However, the depreciation and
amortisation cost along with the interest cost still do not reflect the full
quarter effect of 3G related debt. Hence, going forward, we expect these
costs to rise, thus keeping margins and profitability under pressure. At the
CMP of | 82, the stock is trading at 26.6x FY12E EPS of | 3.1 and 22.7x
FY13E EPS of | 3.6. We have valued the stock using the DCF
methodology, assuming 5.5% CAGR  in revenue over FY11E-FY20E and
terminal growth rate of 3% thereon. We maintain our target price of | 84.
We continue to rate the stock as HOLD.

Hold Sanghvi Movers; Target : Rs 116 :: ICICI Securities

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C h a n g e   i n   a c c o u n t i n g  p o l i c y   d a m p e n s   p r o f i t …
Sanghvi Movers’ (SML) net sales of | 109.9 crore for Q2FY12 were higher
than our estimates. The EBITDA margin of 71.2% was in line with our
estimates. However, the real dampener was the interest cost, which
resulted in a PAT of | 14.5 crore, a 40.8% YoY decline from the reported
PAT of | 24.5 crore in Q2FY11. This high interest cost of | 25.6 crore in
Q2FY12 was mainly on account of a change in the accounting practice for
borrowing cost, which resulted in an additional interest cost with a prior
field impact of | 6.5 crore. SML’s total revenues stood at | 109.9 crore
reflecting a growth of 22.6% YoY and 4.2% QoQ.
ƒ Blended yield and capacity utilisation fall sequentially
The blended yield of 2.83% in Q2FY12 was below Q1FY12 yield of
2.9% mainly on account of higher proportion of new cranes (~ 63%
of gross block). The average utilisation for Q2FY12 dropped to 84%
(86% in Q1FY12), primarily due to higher competition and lower
overtime.
ƒ Windmill sector contributes ~39% of total revenues in H1FY12
In terms of sector wise break-up of revenues for H1FY12, the wind
mill sector contributed 39%, power contributed 30%, refinery and
gas contributed 18%, steel and  metal contributed 5%, cement
contributed 4% and other industries contributed 4%.
V a l u a t i o n
Sanghvi Movers has registered strong revenue growth in the past
quarters. However, going ahead, we remain cautious because of the
slowdown in the economy. We have downgraded our FY13E EPS to |
19.4 on account of expected project delays in the steel, power & windmill
sectors. At the current price of | 106, the stock is trading at 5.5x its FY13E
EPS of | 19.4. We recommend a HOLD rating on the stock with a target
price of | 116, 6.0x FY13E EPS.

Hold Great Offshore; Target :Rs 122:: ICICI Securities

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L owe r   r e v e n u e ,   h i g h e r   i n t e r es t   c o  s t   d e n t   p r o f i t s…
Great Offshore (GOL) reported a dismal performance, which was below
our estimates on both the revenue as well as profitability front. On a QoQ
basis, revenues reported an 14%  decline to | 187.2 crore (I-direct
estimate: | 234.5 crore) while net profit declined by 88.2% to | 6.5 crore
(I-direct estimate: | 18.1 crore). GOL’s EBITDA margin dipped 891 bps on
a QoQ basis to 39.5% and EBITDA declined by 30%. GOL’s debt has been
spiralling and increased from | 2343 crore in FY10 to | 3218.45 in FY11.
Lower EBITDA generation and higher  interest cost (interest cost as
percentage  of  EBITDA  is  up  from  32%  in  Q1FY12  to  60%  in  Q2FY12)
along with absence of extraordinary income have led to a severe decline
in net profit.
ƒ Fleet status
During Q2FY12, GOL sold three vessels namely, Malaviya six, Malaviya
12 and Malaviya 34 reducing the fleet size to 44 vessels consisting of two
drilling units, 26 offshore support vessels, three marine construction
assets, a floating dry dock and 12 harbour tugs. A drilling rig and a PSV
are on order and are expected to join the fleet by December 2012.
ƒ Earnings revision
We have revised our earnings estimates for GOL to factor in the impact of
a) lower-than-expected performance in H1FY12, b) reduction in fleet size
c) change in exchange rate assumptions for FY12E and FY13E and d)
some other minor changes. We have revised downward our earning
estimate for FY12E by 42% to | 21.9 and FY13E earning estimate by 43%
to | 22.4.
V a l u a t i o n
At the CMP of | 116, the stock is trading at 5.2x FY13E EPS of | 22.4 and
0.33x FY13E book value of | 348. GOL’s profitability has been driven by
exceptional income in FY11 (| 58 crore) and H1FY12 (| 48 crore), which is
a serious cause for concern as majority of the operating profits have been
eaten out by interest and depreciation costs. We have valued the stock at
0.35x (Q1FY12 0.65x) FY13E book value to arrive at a price target of | 122.
We have downgraded the rating from BUY to HOLD.

Buy Jet Airways; Target :Rs 330 :: ICICI Securities,

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W o r s t   e v e r   q u a r t e r …
Jet Airways (JAL) reported consolidated revenues of | 3,684.5 crore (up
7.0% YoY, down 7.2% QoQ) that were lower than our estimated revenues
of | 3,863.0 crore due to a higher-than-expected drop in yields in the
domestic and LCC segment (JetLite). International operations, that
accounted for 57% of total revenues, performed well with revenues in
this segment recording growth of 11.6% YoY and positive EBITDA of |
184.6 crore DUE to balanced demand supply mix. On the cost front, fuel
costs and employee costs continued to remain higher and rose sharply
by 51% and 23% YoY, respectively. As a result, the company reported a
net operating loss of | 148 crore. Its loss for the quarter further widened
to | 815 crore due to incurring of forex loss to the tune of | 276 crore.


ƒ Lower yields and higher fuel costs dent margins
During the quarter, yields for the domestic segment, especially low
cost segment (LCC), remained under pressure partly due to the
competitive pricing strategy adopted by major competitors and
partly due to increase in the supply (ASKM). As a result, Jet
(domestic) and JetLite’s revenue per pax declined 4% and 15% YoY,
respectively. Fuel prices for the quarter rose over 35% YoY and with
18% increase in the departures, fuel cost for the quarter went up
over 51% YoY.
V a l u a t i o n s
We revised our revenue forecast downwards by 3% for FY12E taking into
account the current quarter’s dismal performance. However, we believe
the earnings would improve from next quarter onwards as the sector is
heading into the peak season with improved demand and limited fleet
supply. The BKC land deal and aircraft sale and leaseback transactions are
key things on the company’s radar to reduce its debt burden. Further, we
believe any positive policy reforms (like allowing FDI by foreign carriers,
reduction in sales tax, service tax, etc.) to revive the sector would
improve earnings visibility further,  going forward. However, weak rupee
remains a concern over the medium  term. Hence, we remain cautiously
positive on the stock with revised price target of | 330 (i.e. at 7.5x FY13E
EBITDA) and ‘BUY’ rating on the stock.

Buy Lanco Infratech; Target : Rs 17 :: ICICI Securities,

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F o r e x   l o s s  d a m p e n s   t h e   s h o w…
Higher eliminations (42% of sales), lower PLFs in one of its power plants
(owing to maintenance shutdown), higher EBITDA margin in the
construction division and forex loss of | 287.8 crore were key highlights
of Lanco Infratech’s Q2FY12 earnings. Adjusting for elimination & forex
loss (that is notional in nature), Q2FY12 adjusted PAT was at | 14.1 crore
(way below our estimates). We maintain BUY with a revised target of |
17/share (the valuation considers operational projects only). A further
delay in Lanco Budhil (70 MW), gas supply for 765 MW Kondapalli 3
(turbine ready for synchronisation), higher gross debt/equity (4.65x) and
verdict on Perdaman case are key overhang on the stock.
ƒ Commissioning of 600 MW in FY12, Lanco green project delayed
The current capacity of the company stands at 3892 MW. The
operational capacity stands at 2087 MW. In November 2011, the
company synchronised 600 MW - Anpara unit II. Udupi – 600 MW
commissioning is being delayed till June 2012. We expected Lanco
Budhil (70 MW) and Lanco Teesta to get commissioned in Q2FY13.
ƒ High EBITDA margins in construction segment
Construction division margins stood at 19%. The consolidated order
book stands at | 29230.5 crore of which ~ 85-90% is from the
captive business (thermal power and solar power).
V a l u a t i o n
At the CMP of | 14.5, the stock is trading at a P/E of 14.5x and 10.8x on
FY12E and FY13E EPS, respectively. Similarly, on P/BV multiples, the
stock is trading at 0.8x FY12E and FY13E, respectively. We have valued
the stock on a sum of parts valuation (SOTP) basis.

Hold Tata Steel; Target : Rs 447 ::ICICI Securities

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D o m e s t i c   m a r g i n s   u n d e r   p r e s s u r e …
Tata Steel’s Q2FY12 numbers were broadly below our expectations,
primarily on the back of the muted performance of domestic operations.
The EBITDA/tonne of domestic operations at ~US$364/tonne was notably
lower than our expectation of ~US$400/tonne. Tata Steel Europe (TSE)
reported an in line performance for Q2FY12 wherein the EBITDA/tonne
for TSE stood at ~$31.5/tonne, which was broadly in line with our
estimate of US$25/tonne. Primarily due to higher input costs, the
consolidated EBITDA margin declined 440 bps YoY and 510 bps QoQ to
8.4% (our estimate: 10.8%). Furthermore, there was significantly higher
tax outgo (86.7% in Q2FY12 as against 27.5% in Q2FY11) during the
quarter under review. As a result, the ensuing consolidated PAT during
the quarter under review stood sharply lower both QoQ and YoY at |
212.4 crore.
ƒ Operational performance
For the domestic operations, the  company posted an underlying
EBITDA/tonne of ~ US$364/tonne as against our estimate of ~
US$400/tonne (Q1FY12 EBITDA/tonne  for domestic operations was
~US$437/tonne). Higher raw material costs coupled with higher
royalty costs and forex loss of ~ | 150 crore led to EBITDA margin
of domestic operations sliding by ~580 bps QoQ to ~34%. Tata
Steel Europe (TSE) reported an in line performance for Q2FY12.
While the volume at 3.48 million tonnes (MT) was better than our
estimate, the EBITDA/tonne for TSE in Q2FY12 was at ~$30/tonne,
which was in line with our estimate of ~$25/tonne.
V a l u a t i o n
At the CMP of | 430, the stock is discounting its FY13E EPS by 6.2x and
EV/EBITDA by 5.0x. We have a cautious view on the company on account
of subdued demand growth seen domestically and increased global
macro headwinds. We have valued the Indian operations at 5.5x its FY13E
EV/EBITDA and European and Asian subsidiaries at 4x its FY13E
EV/EBITDA.  We  have  arrived  at  a  target  price  of  |  447  and  assigned  a
HOLD rating to the stock.

Buy GE Shipping; Target : Rs 247 :: ICICI Securities

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D i s a  p p o i n t i n g   o p e r a t i n g   p e r f o rm a  n c e…
Great Eastern Shipping (GE Shipping) reported a performance, which was
below estimates on both revenue and profitability front. GE Shipping
reported a flattish topline with QoQ growth of 0.4% at | 678.8 crore (Idirect estimate: | 697.4 crore) while net profit declined by 83% to | 27.3
crore (I-direct estimate: | 136.5 crore). The significant decline in net profit
was mainly on account of lower EBITDA margin and higher interest cost
(additional interest to the tune of | 57 crore) on account of exchange
fluctuation. The EBITDA margin declined 702 bps, which led to a 17%
decline in EBITDA to | 223 crore. Depreciation also increased by 13% to |
138.8 crore further negatively impacting the net profit for the quarter.
ƒ Fleet status
During the quarter, GE Shipping acquired two dry bulk carriers and
subsequent to the quarter sold one  product carrier. The total shipping
fleet now stands at 35 vessels aggregating 2.66 million dwt with an
average age of 8.1 years. Over the next two years, the company will be
adding six offshore vessels consisting of two AHTS, three OSVs and one
rig taking its offshore fleet to 25 vessels.
ƒ Earnings revision
We have revised our earnings estimates for GE Shipping to factor in the
impact of a) changes in the fleet b) lower EBITDA margin c) change in
exchange rate assumptions for FY12E and FY13E and d) some other
minor changes. We have revised downward our earning estimate for
FY12E by 28% to | 32.2 and FY13E earning estimate by 27% to | 36.9.
V a l u a t i o n
At the CMP of | 224, the stock is trading at 6.1x FY13E EPS of | 36.9 and
0.50x FY13E book value of | 449. We have valued GE Shipping on P/BV
and assigned a multiple of 0.55x (Q1FY12: 0.6x) with a price target of |
247. We recommend a BUY rating on the stock. Existing investors should
continue to hold the stock

Buy Opto Circuits; Target :Rs 309:: ICICI Securities

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G r o w t h   i n t a c t   b u t   W C  c o n c e r n   r e m a i n s …
Opto Circuits’ Q2FY12 results were slightly above our estimates. Results
are not comparable YoY as it acquired US based Cardiac Science (CSC),
NS Remedies and Unetixs Vascular in H2FY11. Net sales increased 69.6%
YoY to | 562 crore in line with our expectation of | 558 crore on the back
of 100% growth in non-invasive segment. EBITDA margins declined ~440
bps YoY to 27.5% due to consolidation of Cardiac Science Corporation
(CSC) while QoQ margins remained muted. The improvement in EBITDA
margins was not seen as the company has not capitalised any R&D cost
during the quarter. Net profit increased 57% to | 121 crore above our
expectation of |112 crore. With continuance of the strong quarterly
performance, we are maintaining our BUY rating on the stock.
ƒ Medical devices sales double
The non-invasive (medical devices and consumables) segment
witnessed a robust growth of 100% to | 464 crore on the back of the
consolidation of Cardiac Science  and new tenders received by it.
Cardiac Science entered into an  exclusive distribution agreement
with Omron Healthcare to distribute the JMHLW approved Omron
Automated External Defibrillator Powerheart G3 HDF-300 in Japan.
Japan is the second largest market in the world for AEDs with more
than 65000 AEDs sold annually.
ƒ Increase in working capital cycle remains a concern
The working capital cycle has increased by 20 days in H1FY12 to 241
days compared to 221 days in FY11 on the back of a sharp reduction
in current liabilities. Current liabilities have reduced from 169 days in
FY11 to 105 days in H1FY11. The debt increased around | 200 crore
from the yearly closing to | 1082 crore.
V a l u a t i o n
At  the  current market  price,  the  stock  is  trading  at ~10x  FY12E  EPS  of  |
24.2 and ~9x FY13E EPS of | 29.1, respectively. Overall, we expect
Opto’s sales, EBITDA and PAT to grow at a CAGR of 27%, 25% and 19%,
respectively, between FY11 and FY13E. We have valued the stock at |
309 i.e. 11x FY13E EPS of | 28.1 with a BUY rating.

Infrastructure: Regular operations continue; but regulatory uncertainties remain an overhang :: Kotak Sec

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Infrastructure
India
Regular operations continue; but regulatory uncertainties remain an overhang
GVK and GMR reported 2QFY12 results on continued regular operation of existing
assets. However, the companies continue to face regulatory uncertainties related to
potential ADF charges at Mumbai and Delhi airports, treatment of real estate in airport
projects and gas unavailability issues. We continue to await clarity on these issues. We
also note high debt levels straining balance sheet and cash flows (especially for GVK).

Hold Tech Mahindra; Target : Rs 591 ::ICICI Securities

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B T   p r i c i n g   h u r t s …
Tech Mahindra reported Q2FY12 revenues of | 1,333 crore vs. our | 1,339
crore estimate led by growth in non-BT revenues. EBITDA margins at
15.7% were even below our modest 16.2% estimate, a decline of 340 bps
QoQ primarily due to wage hikes given. Further, the company had markto-market (MTM) translation losses of | 52.2 crore on its foreign currency
debt of | 722 crore (50% of total debt). Volume growth continues to be
tepid as BT volumes declined 5%  QoQ while non-BT grew ~7% QoQ.
Noticeably, BT account pricing is likely under pressure as though Tech
Mahindra gained market share in some of the re-tendered contracts,
revenues declined 5.5% QoQ with BT contribution declining 3 percentage
points (pp) to 37% of Q2 revenues. Management commentary suggests
softer Q3 and Q4 as BT revenues/EBIT could be under pressure this fiscal.
The impending merger with Mahindra Satyam remains the only trigger
for the stock. We maintain our HOLD rating on the stock.
ƒ Operating metric highlights
BT revenues declined 5.5% QoQ to $109.6 million while non-BT
revenues grew 7.3% sequentially. Top 5 excluding top 1 client likely
grew 9.3% QoQ while top 6-10 clients have grown 13.6% QoQ.
Geographically, the US contribution increased 1 pp to 33% vs. 32%
in Q1 while the rest of the world was 20% (17% in Q1). Utilisation
levels increased to 72% from 71% and the total net additions stood
at 807. However, the number of software professionals declined by
1255 in Q2FY12. Active client roster was flat at 128. BPO revenues
increased 1.6% QoQ to | 124 crore vs. | 122.1 crore in Q1FY12.
Consolidated EBITDA  and EBIT margins declined 340 bps and 462
bps QoQ, respectively, due to wage hikes given this quarter.
V a l u a t i o n
We continue to value Tech Mahindra at 5.3x our FY13E EPS estimate of |
65.9 plus value of holding in Mahindra Satyam. The rationale for lower
P/E multiple includes feeble revenue growth and uncertainty surrounding
BT revenue growth and pricing. We continue to apply a 15% holding
discount for Mahindra Satyam considering the company has settled a
majority of its lawsuits and that restructuring has shown visible results

Kingfisher Airlines: Waiting for fund infusion: ICICI Securities

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F u n d   i n f u s i o n   a   k e y   t ri g g e r ,   g o i n g   f o r w a r d …
Kingfisher Airlines (KFA) reported consolidated revenues of | 1,528 crore
(up 10.5% YoY, down 18.8% QoQ) that were lower than our estimated
revenues of | 1,680 crore due to a higher-than-expected drop in yields
domestically. It declined 16% YoY. International operations, that
accounted for 25% of total revenues, performed marginally better
compared to the domestic segment. Revenues in this segment grew
11.0% YoY mainly due to 8% YoY increase in yield. On the cost front, fuel
costs continued to remain higher and rose sharply by 70% YoY. With
lower revenues and high operating costs, the company reported a net
loss of | 469 crore for the quarter.

ƒ Lower yields and higher fuel costs dent margins
During the quarter, yields for the domestic segment remained under
pressure partly due to the competitive pricing strategy adopted by
major competitors and partly due to an increase in the supply
(ASKM). As a result, KFA’s domestic yield declined 16% YoY to | 4.2
per ASKM. Fuel prices for the quarter rose over 35% YoY and with
9% increase in the departures and  rupee depreciation, fuel cost for
the quarter went up by over 70% YoY. Interest cost rose
sequentially by 9% to | 334 crore due to an increase in debt. As a
result, its loss for the quarter further widened to | 469 crore.
V a l u a t i o n s
We have revised our revenue forecast downwards by 7% for FY12E
taking into account the current quarter’s dismal performance. At the CMP
of | 25, the stock is trading at 1.2x and 1.0x its FY12E and FY13E EV/sales,
respectively. We are placing KFA’s rating and target price under review –
the stock price has come off 40% in the past three months as rising
concern on the company’s liquidity crunch for running the business has
undermined investor confidence. However, we believe, any positive
policy reforms like rationalisation of domestic taxes and allowing foreign
direct investment (FDI) are key positive triggers for KFA and the industry,
going forward. Hence, unless we see any development on fund raising or
policy reforms, we will continue to keep our rating UNDER REVIEW.

Buy Aurobindo Pharma; Target : Rs 141:: ICICI Securities

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S h o c k e r ! ! !
Aurobindo’s Q2FY12 numbers were way below our expectations. Net
sales declined ~4% to | 1075 crore, way below our expectation of | 1290
crore due to a decline in all major revenue streams. EBITDA fell sharply
by ~55% to | 114.63 crore on account of a decline in sales and higher
proportion of low margin APIs. The company reported a loss of | 80.2
crore against our expectation of a profit of | 73 crore on account of forex
losses to the tune of | 185 crore. These numbers have blurred the
visibility and we believe it is time to revisit our earlier estimates. Hence,
we are revising our strategy by sharply cutting our growth estimates for
FY12 and FY13. We have now built a base case and bear case scenario as
we still expect some more downside pressure on the stock.
ƒ Telangana issue seems to be blowing out of proportion…
The ongoing Telangana agitation was the major factor over and
above issues such as subdued European demand, USFDA embargo
on Unit VI and dried approval pipeline in the US. The agitation badly
affected the logistics in the entire region and most of the company’s
plants are located in the same region.
V a l u a t i o n
We are contemplating a revised strategy on account of fresh concerns
about the performance, going ahead, over an above pending USFDA
issues. (i) The debts as on September 30, 2011 were ~| 3045 crore. With
shrinking profitability, FY12E debt/EBITDA now stands at an alarming
level of ~4.5x. We expect normalcy in business to return only in FY13. (ii)
Further depreciation of the rupee will stretch the balance sheet. (iii) The
Telangana issue has now become a new matter of concern for the
company, (iv) We have built valuation scenarios on our revised estimates.
The best case target price is | 141, based on 7x FY13E EV/EBITDA.
Similarly, our bear case target price is | 79, based on 5x FY13E
EV/EBITDA. We believe it is time to be lightweight on the stock amid
global issues and internal concerns. We have changed our methodology
from PE to EV/EBITDA on account of high leverage. We advise investors
to hold the stock for a revised target price of | 141. Fresh buy can only be
considered in a Bear case scenario at | 79.

Energy: Between a rock and a hard place :: Kotak Sec

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India
Between a rock and a hard place. We suspend our ratings and target prices on
downstream oil companies (BPCL, HPCL and IOCL) in light of an uncertain macroenvironment
with (1) high crude oil prices and high subsidy burden, (2) weakening
Rupee and (3) lack of government action. We see limited options available to the
Government to manage the subsidy situation given its fiscal, inflationary and political
constraints. It is still possible to make money in these stocks based on short-term
trading opportunities but ratings and earnings estimates have largely lost meaning in
the current environment.

Tech Mahindra: Core business outlook weak :: Kotak Sec

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Tech Mahindra (TECHM)
Technology
Core business outlook weak. TM’s reported 2QFY12 EBITDA of Rs2 bn (-23.8% yoy,
-15.6% qoq) missed our estimate by 13.4%. Revenues of US$296.2 mn also missed our
estimate with non-BT growth neutralized by decline in BT revenues. EBITDA margin
declined 340 bps qoq to 15.3% on wage revision and transition costs of BPO contracts.
Outlook is bleak as BT business re-tendering and rate pressure will likely hurt revenues,
profitability and net income. Maintain SELL with SOTP-based TP of Rs600.

Max India - Sell :: Business Line

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We recommend you sell the stock of Max India from a short-term perspective. It is seen from the charts of the stock that it was on an intermediate-term uptrend between late February and September 2011, from Rs 137 to Rs 214. However, encountering significant long-term resistance in the band between Rs 215 and Rs 220 in September, the stock changed its trend, triggered by negative divergence in daily relative strength index. Since then, the stock has been on a medium-term downtrend. After encountering key medium-term resistance in late October at around Rs 190, the stock resumed its downtrend. On Tuesday, the stock fell 3 per cent accompanied by above average volumes, breaching its 21-day moving average.

It is trading well below its 21- and 50-day moving averages. Both daily as well as weekly RSI are slipping in the neutral region towards the bearish zone. Daily moving average convergence divergence indicator is hovering in the negative territory and has signalled a sell. The daily and weekly price rate of change indicators are featuring in the negative area, implying selling interest. Our short-term outlook on the stock is bearish. We expect its decline to continue and reach our price target of Rs 171 or Rs 165.5 in the forthcoming trading sessions. Traders with short-term horizon can consider selling the stock while maintaining stop-loss at Rs 182.

Nov 20 week: Pivotals: Reliance Industries, Tata Steel, Infosys, SBI :: Business Line

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Pivotals: Reliance Industries (Rs 808)

RIL plummeted Rs 75.8 or 8.6 per cent accompanied with good volumes in the previous week. However, it is trying to find support around the Rs 785 and Rs 800 zone, after retracing 61.8 per cent Fibonacci retracement level of its prior up move (between August low of Rs 713 and November peak of Rs 902). The stock has breached Rs 847 and reached both the supports mentioned last week.

Currently, the stock hovering above a crucial short-term trend deciding level of Rs 785. A fall below this will be a cue for initiating fresh short positions with stop-loss at Rs 830. Downward targets are Rs 760 and Rs 740.

On the other hand, strong jump above immediate key resistance level of Rs 835 will push the stock higher to Rs 860 and Rs 885. Strong up move above Rs 900 is required to emphasise bullish momentum and take the stock higher to Rs 920 or even to Rs 970. The stock continues to be in a medium-term downtrend. It has significant long-term support in the zone between Rs 700 and Rs 750. Investors with medium-term perspective and greater penchant for risk can capitalise on declines and buy the stock with stop-loss at Rs 700.

State Bank of India (Rs 1,725.5)

In line with our expectations, the stock declined last week and is testing its key support at Rs 1,710. It has dropped 4 per cent with good weekly volumes. The short-term trend is down for the stock. It is further trading well below its 21- and 50-day moving averages. Both daily and weekly indicators are featuring in the bearish zone.

The stock is testing vital support at the Rs 1,700-mark. An emphatic dive below this level will strengthen the stock's medium-term downtrend and pull it down to Rs 1,637 and then to its July 2009 trough formed at around Rs 1,510, in the weeks ahead. Therefore, short-term traders should tread with extreme caution in the coming week.

A rebound from Rs 1,700 will encounter resistances at Rs 1,800, Rs 1,860 and Rs 1,900. The next important resistance is at Rs 2,000.

Tata Steel (Rs 392.5)

Tata Steel plunged 8.7 per cent accompanied by above-average weekly volumes in the previous week. The stock is currently testing its key longer-term support band between Rs 390 and Rs 400. Inability to move above Rs 410 will be an indication for a fresh short position while maintaining stop-loss at that level. The stock can decline to Rs 380 and Rs 365 in the short-term. But a reversal upwards from the stock support band and a rally above Rs 410 can push the stock higher to Rs 423, Rs 437 and Rs 450 resistances.

The stock appears to have resumed its medium-term downtrend. We reiterate that a strong weekly close below the significant support zone between Rs 390 and Rs 400 will pave the way for a decline to Rs 353 in the medium-term. However, a conclusive breakthrough of resistance at Rs 515 will modify the downtrend.

Infosys (Rs 2,739.5)

Infosys outperformed the other pivotals by declining only 1.3 per cent in the previous week. We adhere to our prior view that an upward reversal from Rs 2,700 will be sign for initiating fresh long positions with stop at Rs 2,690 for short-term traders. Targets are Rs 2,850 and Rs 2,900. Short-term supports for the stock are pegged at Rs 2,730, Rs 2,700 and Rs 2,660.

As long as the stock trades above Rs 2,660, its short-term uptrend stays intact. A fall below Rs 2,660 will spell peril for the stock's short-term uptrend and the stock can then tumble to Rs 2,550 and to Rs 2,450. Strong breakthrough of its important medium-term resistance level of Rs 3,000 will propel the stock northwards to Rs 3,500 in the months ahead.

Switch from BGR Energy to BHEL :: Business Line

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Delay in commissioning of power projects, difficulty in getting customers to pay dues on time and unrelenting competition from foreign players have made the going tough for power boiler, turbine and generator (BTG) makers in the country.

The impact of the harsh environment is visible in the performance of mid-sized players such as BGR Energy Systems. With the company facing slowing order flows, high debt and a decline in sales and profits for three quarters now, investors can pare exposure to the stock.

The stock will be worth revisiting on an improvement in the power development scenario.

OVERCROWDING

BGR Energy made a well-timed move into the power equipment space but soon witnessed competition from local players, which entered into ventures with foreign companies. Then there were the Chinese and Koreans who were already giving market leader BHEL a run for its money. The overcrowding now has led to aggressive pricing by new players such as BGR Energy, even as the market leader BHEL has simply decided to forsake a bit of its market share.

For instance, as the lowest turbine bidder in NTPC's bulk tender, BGR quoted an aggressive price of Rs 0.9 crore per MW, reportedly at least 20 per cent lower than the next bid. Such aggressive bidding may have negative margin implications, if it becomes the norm.

BGR's operating profit margins actually expanded over 2 percentage points to 13.7 per cent in the September quarter, over a year ago, aided by strong growth in the capital goods (BTG) space.

However, high margins may not be sustainable for two reasons: One, the present order book is tilted 85 per cent in favour of the less lucrative engineering, procurement and construction (EPC) contracts. Two, aggressive pricing of equipment orders may mean lower profit margins on such projects.

ORDER SLUMP

BGR Energy's order book as of September 2011, at Rs 7280 crore, covered sales of FY-11 by just 1.5 times. This is well below 6.2 times two years ago and 2.6 times a year ago, suggesting reduced revenue visibility.

This problem is compounded by significant delays in the awarding of prime orders such as the Rs 6500-crore EPC order by Rajasthan SEB. Resurgence of order flows in the power equipment space will be key to providing the critical mass needed to improve BGR's revenue prospects.

On the funding side too, BGR Energy has been troubled by delayed payments by a few State Electricity Boards. The average time taken to realise cash from sales — also called debtor days — was 330 days as of September 2011, up from 240 days in the last fiscal.

This stretched working capital is cause for worry as it may not only force the company to borrow more but also limit its order intake. The company's debt to equity ratio at 2.1 times, although not alarming, provides limited room for stretching itself for capital investments planned.

Given the above concerns and the current order tilt in favour of the lower margin EPC segment, BGR Energy's price earnings multiple of 8.3 times its expected FY-13 earnings (current price of Rs 274) is not at a sufficient discount to market leader BHEL's estimated valuation of nine times (at Rs 276).

BHEL OFFERS VALUE

Given the current choppy market conditions, this isn't an ideal time for an investor to bail out of any stock. Therefore, investors with a two-three year perspective can consider switching their money from BGR to BHEL, a larger stock in the power equipment space. Investors with a two-year perspective can also invest in this large-cap stock on declines linked to broad markets. The stock is currently close to its yearly low price-earnings multiple. Even after factoring in the concerns in the industry, the valuation appears attractive for the following reasons:

BHEL has continued to keep up the momentum in its revenue growth, essentially suggesting smooth execution. Sales and profits for the latest quarter were both 24 per cent higher than a year ago. The company wisely focussed on the more lucrative industrial segment, which accounted for a third of sales as of September. We expect this segment to temper any slowdown arising from power equipment space.

BHEL's order inflows over the same period were up 6 per cent — certainly not high but still better than the decline in order intake witnessed by most capital goods companies. Order book at Rs 1.6 lakh crore covers FY-11 sales four times over, providing revenue visibility.

Given its scale of operations and the already absorbed technology costs in areas others than the supercritical space, BHEL will continue to enjoy higher operating margins than peers. While margins have slipped from the 20-per cent-plus levels, 17-19 per cent operating margins appears feasible over the next couple of years, given that BHEL has not so far bid aggressively. With an over 50 per cent market share, the company is yet to feel the need to cut back on profitability, to stay at the top. Any introduction of duty on imported power equipment may provide some respite for local players, on the pricing front.

CONCERNS

In the medium term, capacity constraints and resulting execution delays may stretch working capital days. Additional capacities expected to go on stream next year may alleviate this problem. While current orders are expected to keep the company busy for a couple of years, the real test will be when players such like L&T also rise to imposing levels. A relook may be called for then.

Stock Strategy: Siemens likely to move in a range; Buy Hero MotoCorp :: Business Line

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Siemens (Rs 736): After falling sharply since November, Siemens had a reversal in trend on Friday. The stock is now placed at a critical level. Only a close above Rs 835 will change the short-term outlook to positive for the stock. In the short-term, the stock is likely to move in the range of Rs 835-670.

The stock finds immediate support at Rs 702. A conclusive close below that could take Siemens to Rs 670. A close below Rs 670 would change the long-term outlook to negative.

F&O pointers: The Siemens November futures added fresh long positions on Friday. It saw a rollover of just 11 per cent. Most of the positions were on the long side, as December futures commands higher premium over the spot price. Options were not that active. However, some cues available from option trading indicate that Siemens faces strong support as Rs 700 and Rs 740, as puts at these strike prices saw higher accumulation of open interest.

Strategy: Traders can consider going long on Siemens. The stop-loss can be placed at Rs 702 for an initial target of Rs 804.

Traders could also consider a short-strangle using 740 put and 800 call of December series. This strategy is best suited when one thinks the stock is likely to move in a narrow range.

Maximum profit occurs if the stock price settles between the strike prices.

While the maximum profit is limited to the premium collected, loss could be unlimited if Siemens surges or slumps beyond the strangle range mentioned.

Besides, writing (selling) options involves higher margin commitments, as the market lot is 250 units per contract. The Siemens 740 put closed at Rs 39.7 while the 800 call ended at Rs 12.

Hero MotoCorp (Rs 2,194): The long-term outlook remains positive for Hero MotoCorp as long as it stays above Rs 1,855.

However, the stock might face a strong resistance at Rs 2,222. Hero MotoCorp finds an immediate support at Rs 2,035 and a close below that would weaken it to Rs 1,905.

F&O pointers: The Hero MotoCorp November futures added fresh long positions on Friday. It saw a rollover of 27 per cent. Both the December and November futures on Hero MotoCorp are trading in discount against the spot close. However, options signal positive bias.

Strategy: Traders can consider selling 2,200 call that ended at Rs 30 on Friday. While the maximum profit is the premium collected, loss could be unlimited if Hero MotoCorp surges sharply.

Maximum profit would occur if Hero MotoCorp closes below or at Rs 2,200 on expiry.

Market lot is 125 shares a contract.

Follow-up: We had recommended a short on JP Associates and a long on Hindustan Construction Co. While the former achieved the target, the latter moved in opposite direction resulting in losses.

52-week Blockbuster Amtek India :: Business Line

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Part of the Amtek group, Amtek India manufactures components such as connecting rod assemblies, cylinder blocks, flywheel assemblies and turbo charger housing for the auto industry. Its access to marquee clients in the two/three wheeler, car, commercial vehicle and tractor segments has helped it benefit from the continued strong demand for these vehicles after the slowdown of 2008-09. For the year ended 30 June 2011, the company reported a net sales of Rs 1383 crore and net profit of Rs 114 crore, showing a growth of 42 per cent and 50 per cent respectively over the same period last year. Despite the cost pressures that dampened operating profits across the industry, EBITDA margins for Amtek India stood at a healthy 29 per cent, around the same as the previous year. The company has continued its good run in the September 2011 quarter too. One reason for the high margins is the cost advantage arising from the integrated nature of the group’s business and higher share of machined components, subassemblies and exports in the revenue mix. Investor interest in the stock was also driven by the acquisition of a 26.25 per cent stake in the company by another group company Amtek Auto. The follow-up open offer too buttressed the stock price

52 week flop: SKS Microfinance :: Business Line

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The stock of SKS Microfinance, the largest microfinance company in India, had commanded a valuation which was at a premium to even the priciest private banks last year. That was also when it hits its all time high. The company’s for-profit model to finance under-served population, high-growth opportunities, high spreads and the then-low delinquencies enthused the market.

However, fortunes reversed due to corporate governance issues and borrower suicides in Andhra Pradesh (AP) leading to regulatory intervention. AP, the then-largest state in terms of microfinance loan disbursement, introduced an Act putting strict restrictions on Micro Finance Institutions (MFI) and brought SKS’s business in AP to a grinding halt.

As customers hid behind the MFI Act, the asset quality in APdeteriorated. Even as the RBI has since come up with regulations, there is still little clarity as to whether AP would ease its rules to make way for RBI regulations. SKS declared losses in the September ’11 quarter, the third quarter in a row. The losses for the first half of this fiscal surpassed the collective net profits earned over its lifetime. With much of the AP portfolio written off, the loan book has shrunk to two thirds its March 2011 levels. Besides AP, the portfolio is also witnessing moderation in collection efficiency which may prompt the company to go slow on expansion.

Shree Cement: Cement bucks the industry trend, power has no such luck :: Kotak Sec

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Shree Cement (SRCM)
Cement
Cement bucks the industry trend, power has no such luck. Shree Cement (SRCM)
surprisingly bucked the industry trend of a sequential decline in realizations, allowing
for a beat in operating profits at Rs2 bn in comparison to our estimate of Rs1.5 bn. The
power business, though continues to struggle with the high cost of fuel not allowing
SRCM to compete in the open markets, with external sale a negligible 7 MU (-97%
qoq, -86% yoy). We continue to maintain our REDUCE rating with a revised target price
Rs1,850 (Rs1,730 previously), as dependence on pet coke or imported coal will likely
continue to keep a check on margins making the power assets less competitive for
merchant sale.