IRB Infrastructure Developers Ltd. In line 2QFY12, Reiterate Buy �� �� BofA Merrill Lynch

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IRB Infrastructure Developers Ltd.
In line 2QFY12, Reiterate Buy
�� 2QFY12 results in line, Cut EPS, Raise PO, Buy
IRB’s 2QFY12 profit at Rs1.1bn (+11%yoy) was in line. This was driven by
76%yoy jump in E&C profit on better execution offsetting 30% decline in toll profit
mainly on higher interest. Cut EPS by 8% in FY12/13E on higher interest, lower
EPC revenue on Goa project removal but higher E&C margin. Raise PO to Rs213
(earlier Rs210) on roll forward and lower parent net debt. Retain Buy as IRB on ~
80% jump in road length asset portfolio during FY12-14E, 14% EPS growth in
FY11-14E with RoE of 17-19%, strong EPC order book (at 3.3x FY12E sales)
offsetting the decline in toll profit and potential new concession wins.
Mgmt expects competitive intensity to come down
Concall takeaway: (a) Maintain revenue / profit guidance at 15-20% growth (vs
BofAMLest of of 21% /10% in sales/PAT) (b) Expect competitive intensity to come
down in upcoming bids (which looks difficult in our view) (c) Focus on IRR at
~18% for new projects (vs mgmt est. of ~16.5% IRR for Ahmedabad - Vadodara
project) (d) Expect to receive substantial completion certificate for Surat - Dahisar
project in Nov’11 on 95% completion (e) Average traffic growth of 6% (f) on
schedule to commence toll + construction by Apr’11 (FC by 4QFY12) and (g)
about 6% lower revenue due to mining ban on Tumkur - Chitradurga highway
E&C profits up on strong execution, toll profits decline
(a) E&C’s order book fell 14%qoq at Rs96bn on Goa project removal stuck in land
acquisition issue, but includes Ahmedabad - Vadodara highway (37% of o/bk). (b)
E&C revenues was Rs5bn (+74%yoy) driven by substantial completion of Surat -
Dahisar, Jaipur - Deoli and Kolhapur projects, driving profits to Rs655mn
(+76%yoy). (c) Toll revenues grew by 34%yoy to Rs3bn mainly on tariff hike for of
10-18% for 83% of operating road portfolio in 1HFY12 and contribution from
Tumkur - Chitradurga highway (not in 2QFY11).

Tata Motors (TAMO.BO) 2QFY12 – Some Hits, Some Misses  Citi Research

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Tata Motors (TAMO.BO)
2QFY12 – Some Hits, Some Misses
 Domestic results disappointed — With parent reported PAT of ~Rs1bn. Adjusted for
the FX losses (~Rs2.9bn), PAT was above estimates. The quality of earnings
disappointed though, as the beat was driven by lower interest expense / tax write back.
At the operating level, EBITDA was Rs9.33bn (7.2%, down 120bps Y/Y), missing
estimates by 7%. We reckon a mix of cost pressures, heightened marketing spends on
the car business and deteriorating pricing in the car business impacted margins.
Ahead, we expect some sequential improvement in margins given rebound in retail
volumes of the Nano, but believe the near-term environment will remain very
challenging both from a competitive perspective and a volume growth perspective.
 JLR's operating results were in line — with EBITDA of £437m (~15%). PAT of
£238m was 9% below estimates – reflecting higher tax levels in the NSCs. ASPs were
~£43,000/vehicle – down 1.5% Q/Q – reflecting Fx headwinds, despite a rich product/
market mix. Fx impacted EBITDA margins by ~1.3%.
 Conference call takeaways — Mgmt sounded a bit cautious on the domestic
business, noted that initiatives on dealer networks, marketing and publicity will continue
to drag down domestic EBITDA margins. We thought JLR mgmt sounded more
optimistic – no volume guidance provided, but Evoque bookings now at ~30k (20k
earlier). Mgmt noted that J volumes have begun to recover, post the launch of the new
2.2l XF, while LR volumes remain strong. Capex reaffirmed at £1.5bn over FY12.
Freelander volumes’ supply impacted due to Evoque’s production ramp-up.
 Balance sheet – debt levels remain high — Gross debt was Rs439bn – up from
Rs328bn end FY11. Cash balances remain healthy – net auto debt of Rs160bn end 2Q
vs. Rs13.1bn end FY11. Mgmt is attempting to dollarize debt, replacing high cost INR
debt with lower cost Fx debt.
 Paring estimates — We cut EBITDA forecasts for FY12 -14 for parent (no changes to
JLR forecasts) – by 5-10% – reflecting marketing spends / cost pressures. Maintain
Buy; value TTMT on SOTP – Rs 111 / 87 per share for parent / JLR respectively.

BGR Energy Systems (BGRE.BO) Sell: 2Q12 Results Conference Call Takeaways  Citi Research

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BGR Energy Systems (BGRE.BO)
Sell: 2Q12 Results Conference Call Takeaways
 Maintain Sell (3H) — Given: (1) even if orders rebound, we expect margins to decline
structurally and BGR, with its weak BS, could find the going tough; (2) structurally
declining RoEs FY11 - 39% to FY14E – 16%; (3) EPS decline of 10% over FY11-14E
v/s 55% growth over FY08-11 and (4) we expect negative operating CF over the next
three years. Increase our target price to Rs272 to factor in our EPS increase.
 Reason for lower sales — (1) Materials delayed by clients and consultant approval
delays in Kalisindh; (2) engineering issues in Marwa (sorted out now) and (3) severe
monsoons. Reason for higher margins — (1) Captive orders had good margins and
(2) Chandrapur and Marwa projects had a price-variation clause.
 Reason for increased working capital — Increase in receivables from Rajasthan and
TN because of some certification issues (resolved now), payments should start soon
and receivables days will improve. Expect to receive retention money on Kakatiya and
one more projects by 1Q13 and retention money on Vijayawada will be released
gradually from Nov11 to Mar11.
 Sales guidance down - But still aggressive — Sales growth guidance to 2% from
15%. We feel guidance continues to be and factor in sales of Rs40.5bn (15% decline
YoY). Management expect sales of >Rs10bn in 3Q12 (v/s CIRA at Rs10.5bn) and
Rs20bn in 4Q12 (v/s CIRA at Rs15bn).
 Expects Rs55-60bn of orders in FY12E — Won Rs10.1bn of orders 1H12. In the
results concall mentioned had visibility for another Rs45-50bn before Mar12 which
include: (1) 2X300MW TRN Energy EPC of Rs16.9bn announced post 2Q12 (2)
Rs29bn for 4X800MW turbines from NTPC by the Dec11.
 Update on BTG JV — Invested Rs2.05bn so far and expect to invest Rs2.5 by FY12E
and another Rs3bn in FY13E. Will start recognizing revenues from FY14E.

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.

Adani Power (ADAN.BO) Neutral: Recurring PAT 11% Below Expectations  Citi Research

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Adani Power (ADAN.BO)
Neutral: Recurring PAT 11% Below Expectations
 Recurring PAT 11% below CIRA — APL’s 2Q12 Recurring PAT at Rs2.0bn (CIRA
Rs2.3bn) was +59% YoY/ +13% QoQ. Reported PAT was Rs1.8bn due to (1) Rs558m
loss on derivative MTM and (2) Rs332m on recovery of old receivables net of taxes.
 Lower sale units - Higher merchant rates — Net sales at 2959m kWh was lower
than CIRA at 3388m kWh on lower generation and high auxiliary consumption.
Merchant realizations were high at Rs4.70/kWh on account of sales to UPPCL. APL
also made some opportunistic purchases in the UI market at Rs2.53/kWh and sold the
same at higher rates in the merchant market.
 Other takeaways — (1) APL is not providing cash MAT taxes (Rs902m in 1H12) yet
and is disputing the amendments in the Budget. Taxes in P&L are deferred in nature;
(2) Receivable days have moved up from 58 days to 74 days over the last year.
 Fuel costs - Higher than expected — At Rs1.33/kWh of generation on (1) rupee
depreciation and (2) because the company has provided for outstanding costs of
imported coal. Ex the above two reasons, fuel costs were in line at Rs1.04/kwh of
generation.
 Update on capacity addition — APL has commissioned (CoD) 2640MW of Mundra
capacity. The 6th unit of 660MW could not supply power because of a transmission
constraint. The 7th unit of 660MW has also been CoD. The 8th unit will be CoD in next
1.5 months. The 9th unit of Mundra will be CoD by Feb12. APL also expects two units
of Tiroda to be synchronized by Apr12.
 Target price Rs86 — Revise down EPS estimates by 7-25% over FY12E-20E to factor
in: (1) lower PLFs, (2) higher fuel costs and (3) higher O&M costs. Adjust our target
price to Rs86 (Rs87) to factor in (1) EPS revision and (2) roll forward of target P/BV of
2.0x to Mar13E (Dec12E). We remain cautious on APL given domestic coal shortages,
high imported/ e-auction coal prices and APL’s case-I PPAs.

Sadbhav Engineering :: 2QFY2012 Result Update :: Angel Broking

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For 2QFY2012, Sadbhav Engineering’s (SEL) numbers came in ahead of our and
street expectations. Order inflow for the quarter was at dismal `101cr as
expected, but order book remains healthy at `6,259cr (2.8x FY2011 revenues).
We believe SEL has performed better than its peers on the bourses and would
continue to do so owing to 1) consistent quarterly growth on the earnings front
unlike its peers which are marred by various headwinds; 2) better management of
its finances with one of lowest leveraged balance sheet (standalone) despite a
healthy portfolio of BOT assets; and 3) robust order book which lends revenue
visibility. Hence, we maintain our Buy rating on the stock and as our top pick.
Strong quarterly performance: SEL reported strong 65.0% yoy growth on the
top-line front to `430.4cr (`260.9cr) vs. our estimate of 48.0% growth. SEL has
been able to maintain a sturdy execution pace for captive road BOT projects since
the last few quarters, leading to robust revenue growth. On the margin front, the
company posted EBITDAM of 10.5% (12.0%), below our estimate of 11.3% mainly
due to commodity price pressures. Interest cost stood at `15.4cr (`9.0cr),
registering a jump of 70.9% yoy/22.5% qoq on account of rising interest rates.
On the earnings front, SEL reported 32.1% growth yoy to `18.1cr (`13.7cr),
higher than our expectation of `16.9cr on account of higher top-line growth.
Outlook and valuation: SEL’s management expects the current intense
competition to subside in couple of quarters, however denting the order inflow
target for the fiscal. We believe that given SEL’s strong execution capabilities,
healthy balance sheet, increasing opportunities on road front and expected
rationality in bidding process would ensure consistent order inflows for company
in FY2013 and hence investors should not be wary of slowdown on order inflow
front on quarterly basis. Our SOTP-based target price works out to `165/share,
implying a 25.7% upside from current levels, based on a target P/E multiple of 9x
to its FY2013E earnings and valuing its BOT arm on DCF basis. Thus, we
maintain our Buy view on the stock and as one of our top picks in the sector.

Telecom: India wireless—2QFY12 review:: Kotak Sec

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Telecom
India
India wireless – 2QFY12 review. Sep 2011 earnings reports from the Indian wireless
players disappointed a tad though not enough to alter our positive view on GSM
incumbents Bharti and Idea. Disappointment was driven by sedate and belowexpectations
India wireless volumes even as underlying upward RPM trajectory held up.
A more decisive call on whether minutes disappointment was just higher seasonality or
if there was some negative elasticity will have to wait for Dec 2011 earnings reports.
3G data off-take remained subdued. Bharti Africa had a strong quarter. We remain
constructive on Bharti and Idea and negative on RCOM.

Maruti Suzuki :Action: We downgrade MSIL to Neutral with a new TP of INR1153: Nomura Research

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Not attractive unless JPY moves in favour
Strong volume growth in FY13F
and increase in localization not
enough to offset JPY impact

Action: We downgrade MSIL to Neutral with a new TP of INR1153
MSIL had a weak H1FY12, impacted by strikes and weak demand. Given
the low base, we expect volume growth to be strong in FY13F. However,
that may not be enough to offset the impact of 12% JPY appreciation over
the last four months, which will impact margins from Q3FY12 onwards.
Targeted localization over the next three years will compensate for a mere
5% JPY appreciation, in our view. We prefer Tata Motors and Ashok
Leyland as plays on an improving interest-rate scenario next year.
Catalysts: Downsides from weaker demand, tough competition; JPY
depreciation could be positive
 Weaker-than-expected demand: We expect volume growth to improve
to 15% in FY13F. In case the demand remains weak due to factors like
steep competition, increased duty on diesel cars or further increases in
fuel prices, it could have a material negative impact on our estimates.
 Competition to limit ROEs: While we expect that MSIL will continue to
maintain a leadership position, we believe that it will come at the cost of
lower ROEs. Pricing power to offset increases in costs will be limited.
 JPY depreciation could be a positive: 5% depreciation in JPY from its
current levels could lead to up to 100bps margin expansion for MSIL.
Valuation: TP of INR1153; based on 14x 1-yr fwd consolidated EPS
We value MSIL at 14x one-year forward consolidated EPS (average of
FY13F and FY14F) of INR82.4. We note that the ROEs of the company
have declined to 11% and there is a risk the stock can de-rate further if the
company is not able to achieve targeted localization

KPR MILLS Cotton yarn exports stitch up margins:: Edelweiss

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KPR Mills (KPR) reported a topline of INR3401mn as against our estimate
of INR3245mn, implying a growth of 30% YoY. The surge was primarily
driven by a strong growth in cotton yarn segment which grew 42.4% YoY
on higher exports. However, adjusted for MTM loss of INR122.4mn,
margins stood at 17.3% against our expectation of 17%, largely on
account of higher exports of cotton yarn.
Topline ahead of estimates
KPR reported a topline of INR3401mn ‐ higher than our estimates of INR3245mn ‐
marking a growth of 30% YoY primarily driven by a strong traction in cotton yarn
segment where exports went up from INR4.3mn in Q2FY11 to INR343.4mn in Q2FY12.
Adjusted for MTM loss of INR122.4mn, EBIDTA margin came in higher at 17.3% against
our expectation of 17%, essentially due to higher margins enjoyed by exports of cotton
yarn. Due to such higher margins and lower tax rate, the adjusted PAT came at
INR190mn against our expectation of INR175mn. KPR has completed 90% of its capex
for the new compact yarn and is expected to operate at full capacity utilization post
Dec 2011 (currently operating at 30%).
Sugar subsidiary to bring in self sufficiency in power
KPR has announced a strategic investment to foray into power and sugar by setting up
5000 TCD sugar plant along with a co‐generation capacity of 34MW. The company has
incorporated KPR Sugar Mills Ltd ‐ a wholly owned subsidiary of KPR Mills Ltd. The
total capex for the same is to the tune of INR3.25bn of which INR1.6bn will be utilized
for sugar plant and the remaining for power generation. This will help KPR attain 100%
self sufficiency in power needs. The management expects commercialization of the
plant in H2FY13 (Oct – Dec 2012). However, we have not factored in any revenues
from the sugar plant in our model.
Outlook and valuations: Worst behind us; maintain ‘HOLD’
With a sharp correction in cotton and yarn prices, we believe that the worst is over for
the company. However, we continue to remain cautious on the company’s new
venture into sugar and co‐generation segments. We value the company at 4x FY13E
EV/EBIDTA and arrive at a price of INR148 for the stock. We maintain our ‘HOLD’ rating
on the stock.

LIC Housing Finance: Standard asset provisions and lower margins pull down profits ::Kotak Securities

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LIC Housing Finance (LICHF)
Banks/Financial Institutions
Standard asset provisions and lower margins pull down profits. LIC Housing
Finance (LICHF) reported 10% yoy decline in core earnings on the back of lower
margins even as loan growth was strong at 29% yoy. The company made large
provisions for standard assets (without utilizing excess provisions on balance sheet) to
comply with the recent NHB regulation thereby pulling down reported earnings by 58%
yoy to Rs985 mn. NPLs declined 19% sequentially. We would seek more color on the
movement of provisions to revisit our estimates. Retain ADD with price target of Rs260.

Bajaj Hindustan: Disappointing results ::Kotak Sec

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Bajaj Hindustan (BJH)
Sugar
Disappointing results. BJH reported 4QFY11 EBITDA at Rs553 mn versus our estimates
at Rs1.7 bn. Profitability was lower (EBITDA margin at 5% versus estimate of 19%) as
higher amount of high-cost inventory (FY2011 production) was sold. 9MFY11 margins
(21%) were higher on sale of low-cost inventory of raw sugar. Company has raised
Rs14.7 bn through rights issue out of which Rs11 bn has gone towards reduction of
debt. With SAP at Rs2,400 per ton, we expect profitability to remain under pressure in
FY2012E. We have reduced our estimates. Maintain REDUCE with a TP of Rs30 (Rs60
earlier) at 5.5X March 2013E EBITDA.

Siemens: Forex losses mar PAT; sub-segment performance volatile ::Kotak Sec

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Siemens (SIEM)
Industrials
Forex losses mar PAT; sub-segment performance volatile. Siemens reported strong
revenue growth of 19% yoy, broadly in line with expectations. However, sharp EBITDA
margin contraction (520 bps yoy to 8% on high forex loss of Rs1.6 bn) led to PAT
falling short of estimates (Rs1.7 bn, down 34% yoy). We note sharp volatility in subsegment
revenue as well as margin performance. Retain SELL (revised target price of
Rs640) led by a weak capex cycle, risks to margins, very high valuations.

buy MERCATOR LINES LTD (MLL) TARGET PRICE: RS.38 :: Kotak Sec

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MERCATOR LINES LTD (MLL)
PRICE: RS.24 RECOMMENDATION: BUY
TARGET PRICE: RS.38 FY13E P/E: 15.7X
Subdued Operational performance
MLL reported weak operational performance in the quarter with revenues
growing 16% YoY but declining 2% QoQ to Rs 7.8 bn. The coal segment
(mining and trading) reported revenues of Rs 4.3 bn growing more than
50% YoY but declining 9% QoQ. The operating margins for the coal
segment declined to 8.17% (vs. 7.10% YoY and 9.41% QoQ). In the shipping
segment, the Singapore subsidiary reported PAT of USD 1.7 mn (falling 70%
YoY) while the Indian shipping business reported loss of Rs 295 mn. The
bulk shipping segment continues to be weak and expected to remain weak
for the next 2 calendar years. We believe the IPO of Oorja Holdings (100%
coal subsidiary), which was earlier expected by end of FY12E to now come
only in FY13E. We are reducing the target price to reflect the fall in shipping
asset prices by 5 to 10 % in the last 3 months and postponement of IPO of
Oorja Holding. We reiterate Buy with a reduced TP of Rs 38 for the stock.

Buy Lanco Infratech : Nomura Research

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At Rs206mn, normalized net loss was lower than our forecast net loss of Rs303mn (consensus forecasted PAT of Rs476mn), while revenues and EBITDA were marginally ahead of our forecast (7-9% below consensus); however, earnings were buoyed by converting Vidhraba SPV from a subsidiary to an Associate. Reported net loss was Rs2.6bn, largely due to notional f/x loss of Rs2.9bn. While power business financials were lackluster and Griffin Coal remains in the red, EPC business surprised positively as solar EPC execution kicked-in. Await mgmt commentary at its earnings call tomorrow; maintain BUY.

Investing in Kotak Child Plan ::Business Line

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A combination of the public provident fund and a pure term cover may deliver the same benefit at lower costs.

Saving towards children's education is a top priority for most Indians. With this in mind, Kotak Life Insurance recently launched Kotak Child Edu Plan, a limited premium “with profits” plan.

“With profits” implies that the plan will declare bonuses if any. This plan will have guaranteed payouts coinciding with the higher education needs at ages between 15 and 21 for your child. As the plan covers your life, the goal is protected in case of unfortunate demise of the insured. This plan's premium paying term is 17 years.

HOW IT WORKS

The plan pays out 125 per cent of the sum insured at different stages of your child's life to meet education expenses. Payouts are at 15 per cent of the sum assured at 15, 20 per cent at 17, increasing to 30 per cent at 19 years and 60 per cent at the age of 21. At maturity, the plan may declare a terminal bonus if the portfolio fares well.

Death benefits: Kotak Life will ensure that 200 per cent of the sum insured is paid in the event of your demise, with all future premium obligations ceasing. The policy, however, continues as planned with milestone payments. The accrued and future revisionary bonuses along with terminal bonuses, if any shall be paid at maturity.

Accident disability benefit: In the event of the policyholder's disability due to accident, again future premium obligations cease and the policy continues with all benefits assured at the time of buying it.

Premium: The plan offers premium discount of Rs 2 per 1,000 of the basic sum assured. For instance for a plan with sum assured of Rs 5 lakh the eligible premium discount is Rs 1,000. The premium can be paid yearly, half –yearly, quarterly and monthly.

Eligibility: The minimum age at entry for the policy buyer is 18, the child must be just born. The maximum age of the insured is 64 years, with the child's age pegged at 10. The minimum sum assured is Rs 2 lakh and the premium payable varies based on the mode opted.

OUR TAKE ON THE POLICY

In any traditional policy, be it endowment or money back, returns are based on the frequency of the disbursement and the add-ons opted for. If the risk covers are increased beyond the sum assured offered, a sizable portion of the investments will be deducted towards the risk charges. Returns are likely to be moderate. In this plan, if the insurer earns a return of 6 per cent on the investment the effective returns are likely to be around 4.2 per cent. If the portfolio does well, if the plan is able to earn a return of 10 per cent, the net effective return for the policyholder will be less than 6.5 per cent. In debt investments, the average return a policy holder can expect will be capped at 5-6 per cent.

DOES THIS PLAN SUIT ME?

If you have the discipline to save regularly and invest, this plan will not be an ideal choice for two reasons. One, you can replicate the same benefits if you construct a portfolio with the Public Provident Fund with a pure term cover; this will cost you less.

For the same investment you may also get a higher risk cover. For instance, if a 31-year old male buys a policy with sum assured of Rs 5 lakh, his annual commitment will be Rs 36,104 for his just-born child. At end of the policy period, he would have received Rs 7.62 lakh with an internal rate of return of 4.2 per cent (based on assumed returns of *** per cent). If the individual is in the 20 per cent tax bracket the effective yield could increase to 6 per cent. The total life cover under the plan would be Rs 10 lakh.

The same person building a portfolio with the PPF, if he earns an average return of 7 per cent for the entire investment period of 17 years, would end up investing Rs 19,990 for the same maturity value of Rs 7.62 lakh. His goal would be reached four years ahead of the maturity of the plan.

As to the life cover, for a Rs 20 lakh cover, his premium outgo would be Rs 3,277. Thus, the overall outgo in this PPF plus term cover combination would be Rs 23,267 annually, Rs 12,837 lower than this plan. In the event of untimely death of the bread winner, the beneficiary can utilise 50 per cent of the sum assured Rs 10 lakh for immediate needs.

The remaining Rs 10 lakh can be invested in fixed income instruments at 6 per cent.

This would result in an annual inflow of Rs 60,000, far higher than the investment requirement to meet the goal.

Does this mean this plan is not suitable for you at all? No. If you are not investment-savvy or disciplined, traditional plans such as this may score mainly on account of their forced savings and few riders.

‘We are bullish on large IT companies' Mr I. V. Subramaniam, Chief Investment Officer, Quantum Mutual Fund:: Business Line

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Slowdown creates opportunities for consolidation across various sectors. While in the process of consolidation, companies need to bring their IT systems together and that creates new business opportunities for IT companies.

In a highly volatile market it's tough to manage assets that are too compact in size. The small base will have to cope with sharp falls if investment calls go wrong. But Quantum Mutual Fund has so far managed to overcome some of the tough phases in the market, delivering returns superior to the broad market. In an interview with Business Line, Mr I. V. Subramaniam, Chief Investment Officer, Quantum Mutual Fund talks about the way forward for the equity market and why Quantum thinks there could be a better year ahead.

Excerpts from the interview:

A while ago, you had said that the Sensex would go to 31,000 in 2012. Do you still hold this view?

We are still confident of the number. By June next year we expect to see this kind of number. It may get postponed by a few months, but we are confident it will be there next year.

Our logic is simple. India's earning growth is going up continuously. That comes from the background of sustainable economic growth of 6.5 per cent, though right now it's closer to 8 per cent.

We are looking at inflation of six per cent and, assuming that there is no serious dent in margins, earnings growth will be 12-13 per cent.

For the better-managed companies, it will be in the 15-16 per cent band. If you apply a fair PE ratio to that, markets can inch up to the level we have predicted.

If you look at consensus earnings growth for next two years, by FY-13 the expected Sensex EPS is 1399. If you apply a multiple of 18-20 times, you will find that a 26,000-30,000 range is quite possible.

With the global recession continuing, what is the outlook for the IT sector?

We are bullish on the IT sector because our logic is simple: if the recession continues in the West then cost-cutting will be a theme for large companies. The top managements will look out for opportunities to bring down costs and if that is to happen, IT will play a critical role.

If it takes $80-100 per hour in Western countries to develop a piece of software, the same software can be created in India at $30. Hence, it makes immense sense to offshore work to India. Like any of the previous crises, the reason for outsourcing or offshoring is highly valid because of the cost arbitrage. Therefore, we see lot of opportunities.

The second thing that happens during a recession is that companies stop doing business or go for consolidation. In 2008, consolidation happened in the banking and financial service industry. Today's economic slowdown throws up a lot of opportunities in a variety of the sectors.

For instance, it could be metals and banking. While in the process of consolidation, companies need to bring their IT systems together and that creates new opportunities.While selecting IT stocks, we look out for liquidity and prefer large companies.

Do you see a turnaround ahead for capital goods companies?

If you look at the CMIE data, even now on a month-on-month basis, a lot of orders are bagged by companies.

There are many entrepreneurs who still want to spend on capex and to invest. What happened in the last year is that government projects in the power, road construction and airport sectors witnessed a slowdown.

It is essentially due to policy decisions that these orders are not moving. So you may see a slowdown in those kinds of projects but corporate capex is based on business confidence and the outlook on the future.There could be some delay but I think it will all come back. We saw a capex cycle in the 1990s, and a slowdown between 1997 and 2002. So, we don't see much risk to the current slowdown.

The cycle can turn overnight. For example, oil price declines will change the outlook for most of the people. Or, if government is able to address some of the corruption-related issues, it can change the investment attitude overnight.

In fund management we will always look at valuations and currently stocks from the engineering space are lot more attractive, but one should have patience.

What is the outlook for interest sensitive sectors like auto and banks?

In automobiles there are two kinds of segments. One is commercial vehicles and then there are the four-wheelers and two-wheelers.

Clearly, in two-wheelers, we don't see much problem because of interest rate.

Public transport across India is pathetic except in key metros. Job opportunities are increasing not only in the metros also expanding in other smaller cities.

So, people have to be able to move about cost effectively. If you consider that logic, we will look out for buying opportunities in two-wheelers. The bottleneck we see is lack of petrol bunks in certain areas in the country.

As far as four-wheelers go, people generally only delay buying hem. They do not permanently postpone it. Bear in mind the income levels are going up and so is the wage inflation and same is the case with agriculture minimum support price.

Therefore, the demand will only be postponed. But the interest rate impact will be felt in commercial segment.

If some companies are postponing capex expansion, that will impact the commercial segment. The recent stoppage of mining activities will have a cascading impact even in this space. So, in automobiles some stocks are looking cheap and others expensive.

In the banking space, we think it's more cyclical. Higher interest rates will put pressure for some more quarters.

So for, say, six months, the deposits cost may go up faster than their ability to lend at matching rates. After six months it will be readjusted.

Fixed deposits rates will go down faster and improve margins. So we don't have any issue with bank fundamentals.

We think public sector banks, which have taken more severe beating than private banks, look interesting. But when we buy banks we look at the ones with good asset quality.

Reduce HINDUSTAN DORR OLIVER; TARGET PRICE: RS.35 :: Kotak Sec

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HINDUSTAN DORR OLIVER LTD (HDO)
PRICE: RS.33 RECOMMENDATION: REDUCE
TARGET PRICE: RS.35 FY13E P/E: 9.4X
q HDO's Q2FY12 numbers are lower than our estimates on the revenue and
profit front. Subdued order backlog, delay in engineering/environment
clearances and cost pressures (material as well as financial) pulled down
profits. The balance sheet appears to have deteriorated significantly
thereby resulting in higher interest costs. We are revising our earnings
downwards in view of the rising interest burden on the company.
q Order intake was weak for the quarter though the company is L1 in
Rs.6.0 worth of orders.
q Downgrade to REDUCE on deteriorating balance sheet quality, poor nearterm
earnings and unfavourable environment for project development.

Buy Relaxo Footwear (Relaxo); target price of `420: Angel Broking,

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Relaxo Footwear (Relaxo) reported a disappointing performance for 2QFY2012.
The company’s revenue declined by 7.3% to `200cr qoq, mainly because of
muted volume growth. Operating margin slipped by 294bp to 8.4% on a qoq
basis. On the profitability front, the company reported profit of only `4cr, a dip of
60.1% qoq, in 2QFY2012 as compared to profit of `11cr in 1QFY2012. We
expect the company to report profit of `34cr and `56cr for FY2012E and
FY2013E, respectively. We maintain our Buy recommendation on the stock and
upgrade the target price to `420, based on a target PE of 9x for FY2013E.
Top line expected to grow at a CAGR of 18%: We expect Relaxo to post top-line
growth of 18% CAGR over FY2011-13E to `950cr on the back of a 12% increase
in realization and changing revenue mix (high-value brands Sparx and Flite
contributing 60% to the company’s revenue). Also, the company launched Flite
Pu-Fashion under the Flite brand in June 2011, which is expected to add ~`50cr
to the company’s top line by FY2013E.
Outlook and valuation: We expect Relaxo to post revenue CAGR of 18% over
FY2011-13E to `950cr, aided by a 12% increase in realization. Rubber prices
have seen a decline of ~16% in the past six months, which will lead to improved
margins going ahead. PAT is expected to grow at a CAGR of 44% over FY2011-
13E to `56cr in FY2013E. At `325, Relaxo is trading at 7.0x FY2013E earnings
and P/B of 1.8x for FY2013E. We maintain our Buy recommendation on the stock
with a target price of `420, based on a target PE of 9x for FY2013E.

Aditya Birla Nuvo Ltd. Insurance recovery to drive upside 􀂄 BofA Merrill Lynch,

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Aditya Birla Nuvo Ltd.
Insurance recovery to drive
upside
􀂄 Profit growth moderates but valuations intact; Buy
Factoring 2Q FY12 results, we have cut ABNL’s consolidated EBITDA by 6-7%
for FY12-13E. The cuts are led by 1) lower insurance profits factoring service-tax
adjustments highlighted in 2Q results, 2) weaker outlook for carbon black. Our PO
for ABNL stays unchanged at Rs1090/sh as insurance valuations at this stage are
predominantly driven by premia growth & lower carbon black profits are offset by
better garment valuations; telecom (Idea) valuation in ABNL stays unchanged.
Upbeat on insurance as market growth recovers
A key highlight of ABNL’s 2Q FY12 performance is the 58% growth in NBP in
September. This mostly reflects market share gains and we expect growth to
remain strong led by overall market recovery. We forecast new business growth
at 10% YoY in FY12 (vs -17% in 1H) and 15% in FY13. We expect ABNL to
outperform the industry in terms of NBAP margins, owing to its product mix and
improving persistency.
Uptick in net debt & working capital are concerns
In 2Q FY12, ABNL’s standalone net debt rose 15% QoQ and net working capital
increased 28% QoQ. These increases are points of concern given that standalone
net debt/EBIDTA is already high at 3.5x. Our discussions with the Co indicate low
likelihood of further deterioration. Also, borrowing costs for ABNL are expected to
remain low at least for the next 2 years given fully hedged & low fixed-cost loans.
2Q FY12 results cushioned by conglomerate model
ABNL’s recurring 2Q FY12 net profit stood at Rs2.1bn, up 3% YoY and down 15%
QoQ. Results were below consensus and our expectations due to QoQ pull-back
in insurance profits owing to service tax adjustments and new-business strain.
Among other businesses, carbon black was weaker than expected due to slower
top line while garments did better on a combination of higher growth & margins.

Tata Motors : 2QFY2012 Result Update: Angel Broking,

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Forex loss eclipses healthy operating performance: For 2QFY2012, Tata Motors’
(TTMT) consolidated net profit declined by 15.5% yoy (6.1% qoq) on account of
MTM loss of `439cr on foreign currency loans. Top-line growth of 25.8% yoy
(7.8% qoq) came in slightly better than our expectation, aided by strong 30.3%
yoy (8% qoq) growth in JLR’s revenue. Operating margin contracted by 146bp
yoy (flat qoq) to 12.4% due to raw-material cost pressures in domestic and JLR
operations and unfavorable forex movement. Going ahead, management expects
margins in both the businesses to remain under pressure, led by higher
raw-material costs.

Accumulate SHRIRAM TRANSPORT FINANCE ; TARGET PRICE: RS.580 :: Kotak Sec

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SHRIRAM TRANSPORT FINANCE CO LTD (STFC)
PRICE: RS.557 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.580 FY13 P/E: 9.1X; P/ABV: 2.0X
q During Q2FY12, STFC reported net income slightly higher than our expectations
largely aided by robust securitization income; NIM came at 8.19%
(Q2FY12) supported by huge securitization done during Q4FY11. Net
profit was flat YoY at Rs.3.0 bn on back of higher provisions and writeoffs
(Rs.2.32 bn in Q2FY12 as against Rs.1.23 bn in Q2FY11) on account of
mining issues in Karnataka.
q Securitization was lower at Rs.4.93 bn during Q2FY12. Although
securitization was muted during Q2FY12, income from earlier
securitisation deals are flowing in; disbursement was moderate at 5.0%
during Q2FY12. STFC witnessed healthy AUM growth (20.1% YoY) during
Q2FY12 where old CVs segment constitutes ~75% of total AUM.
q Although STFC has more than three decade of experience in CV financing,
slowdown in CV cycle is likely to put pressure on its asset quality as
well as demand for loans, going forward. Further, unclear regulatory
stance on securitization will continue to put pressure on its borrowing
costs. We believe it would be exigent for them to transfer the rate hike
to borrowers in the slowing CV cycle, thus impact their spread.
q We are further moderating the growth assumption for FY12-13 (10% in
FY12E and 15% in FY13) and downward revising the earnings estimate
for FY12/13. We are modelling earnings to grow at 4.6% CAGR during
FY11-13E with EPS and ABV coming at Rs.61.5 and Rs.284.5, respectively
during FY13E.
q At CMP, stock trades at 9.1x its FY13E earnings and 2.0x its FY13E ABV.
We are assigning multiple of 2.0x one year forward ABV for the stock
and hence with limited upside left from current levels, we maintain ACCUMULATE
rating on the stock with revised TP of Rs.580 (Rs.760 earlier).

SUN PHARMACEUTICALS Taro led to strong swing in profitability :: Edelweiss

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Sun Pharmaceuticals’ (SUNP) Q2FY12 PAT of INR5.97bn was 17% above
our INR5.1bn estimate, despite in line revenue, largely led by robust Taro
performance and forex gain. EBTIDA margin at 41% (versus 32% estimate)
was driven by strong show in Taro (45% operating margin) and lower raw
material costs (down 570bps QoQ). While sharp surge in growth and
profitability at Taro is inquisitive, rest of the operations remained on
track. We raise FY12‐13e earnings estimates 3‐5% to factor in improved
performance in Taro and better realizations. Maintain ‘HOLD’.
Taro’s robust operating performance boosts profitability
SUNP reported a strong operating performance driven by 42% YoY revenue growth and
48.5% surge in EBIDTA. EBITDA margin at 41.4% jumped 790bps (QoQ) led by robust
OPM of Taro (45% vs. 28% est.); ex-Taro, EBIDTA margin improved to 38% from 33% in
Q1FY12 due to inventory gains from sharp currency movement (est. INR650-750mn).
PAT at INR5.97bn grew 6% YoY due to increase in minority interest (from Taro
consolidation) and higher tax rate (15.0% versus 2.5% in Q1FY12).
Strong US sales favourably impacted revenue
Performance in base business was in line with domestic growth of 18% YoY (adj. for
INR150mn third party sales), ROW growth of 22% YoY and stable revenue from Caraco
(US generics) at USD54-55mn. Taro sales of USD138mn (34% YoY) were significantly
ahead of our estimate of USD112mn due to sharp surge in US sales. Few one-time
market opportunities aided growth and the same may not be sustainable as per Taro.
Outlook and valuations: Guidance retained; maintain ‘HOLD’
Despite strong profitability in Taro and booster from INR depreciation, management
has maintained growth guidance of 28-30%. We believe this is attainable, given no
base effect from one-offs in second half and growth momentum from Taro which will
not subside completely. However, long-term growth will be driven by potential pipeline
opportunities in US (incl. Taro) and performance in domestic market. We remain
positive on SUNP, but valuations price in earnings growth potential, hence, we
maintain ‘HOLD/Sector Outperformer’ with revised TP of INR550 (INR520 earlier).

ZUARI INDUSTRIES Hit by plant shutdown :: Edelweiss

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Zuari Industries’ (Zuari) PAT came below expectations on the back of a
lower‐than‐expected EBITDA margin and lower fertiliser sales volume. A
fire accident that resulted in plant shutdowns and a product mix skewed
towards traded fertilisers resulted in the lower margin. Currently both
urea and NPK plants are up and running. While we maintain a positive
long term outlook on Zuari, in view of the lost fertiliser volume (from
unplanned shutdowns), we revise FY12E earnings down by 8% but retain
FY13E EPS. We maintain our ‘BUY’ recommendation on the stock.
Disruption in manufacturing operations hits profitability
Zuari posted a YoY revenue decline of 9.7% at INR18.9bn on the back of a 25.6%
volume fall, largely due to the shutdown of urea and NPK plants during Q2FY12.
This led to a drop in manufacturing volume by 33% YoY. EBITDA margin is below
expectations at 2.7% against 5.1% in Q2FY11 on account of shut downs, resulting
in lower operating leverage. The sales product mix, skewed predominantly towards
traded fertilisers, also contributed to lower EBITDA margin. PAT came below
expectations at INR476mn, posting a YoY decline of 41%.
Key highlights
• Due to the fire accident to the pipeline carrying naphtha to Zuari, urea plant
was shut down for 63 days (40 days during Q2FY12) while NPK plant was shut
down for 20 days (16-17 days in Q2FY12).
• Owing to soaring raw material prices and depreciating rupee, Zuari took 15%-
20% price hike in Q2FY12 and another 20%-25% during Sep-Oct on its NPK
fertilisers.
Outlook and valuations: Operations back on track; maintain ‘BUY’
On account of lost volume due to plant shut downs coupled with lower trading
volume, we have revised down our FY12E EPS to INR93.3/share while maintaining
FY13E EPS at INR126.9/share. In October 2011, operations at NPK plant as well as
at urea plant returned to normalcy. Currently, Zuari is available at 5.7x and 4.2x
consolidated P/E of FY12E and FY13E respectively. We maintain our ‘BUY’
recommendation on the stock with SOTP target price of INR907/share.