Hold Tata Consultancy Services (TCS) Target :Rs 1150 :ICICI Securities,

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M a c r o   s t a r ti n g  t o   b i t e …
TCS reported its Q3FY12 numbers, which were marginally below our
estimates. US$ revenues grew 2.4% vs. our 2.7% estimate aided by 3.2%
volume growth vs. our 3% estimate.  However, the key highlight of the
earnings call was the internal survey of roughly 120 odd clients. Its
findings suggest that of the 80% or 96 clients who have finalised their
budgets, 67% or 64 clients have either increased their budgets or
remained flat while the remaining 32 clients have decreased their
budgets. Noticeably, 50% or 65 of 130 discretionary projects surveyed
have either witnessed delay in decision making or project starts. We
believe the management commentary  is cautious than ever before;
finally, is consistent with peers and indicates the weak macro is starting to
bite. Note, raised consensus estimates already factor in a weaker rupee
(that appreciated 6.4% since January 1, 2012) while multiple expansion is
less likely in the current environment. This implies lack of meaningful
triggers for TCS to perform. Consequently, unfavourable risk/reward &
stock outperformance in CY11 leads us to downgrade TCS to HOLD from
BUY. Yet, we reiterate that sharp sell-offs could make valuations attractive
and should be used as re-entry points by long term investors.
ƒ Earning summary
Q3FY12 US$ revenues grew 2.4% QoQ (2.9% estimate) to $2.59
billion while those in rupees grew 13.4% QoQ (13.5% estimate) to |
13,204 crore (| 13,208 crore). Rupee revenue growth was aided by
volume growth (up 3.2%), constant currency realisation (up 198 bps)
and currency (up 8.95%) while offshore effort shift (down 64 bps)
created a drag. At 29.3%, the EBIT margins were modestly above
our 29.1% estimate while reported PAT of | 2,887 crore was
marginally above our | 2,827 crore estimate.
V a l u a t i o n
We expect FY12E & FY13E rupee revenue/EPS to grow by 29.1%/18.4%
and 11.6%/9.3%, respectively. This translates to revenue/earnings CAGR
of 19%/18% over FY10-FY13E. We continue to value the stock at 20x our
FY13E EPS estimate of | 57.4. Though, we have changed our rating from
BUY to  HOLD, we reiterate that sharp sell-offs could make valuations
attractive and should be used as re-entry points by long term investors.

Hero MotoCorp - "Margins weak, maintain Neutral" ::LKP

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Volume expansion and price hikes leads to strong revenue growth

Hero Motocorp has reported 11% yoy volume growth in Q3 FY12 and had taken a price hike of ~Rs700-1000 per vehicle in October resulting into 17% yoy and 4% qoq growth to Rs60.3 bn. The company has been consistently putting up a strong show by selling ~5.3-5.4 lakh units per month and has won ~2% market share in the quarter. Going forward, with domestic motorcycle industry showing signs of weakening, we expect Hero to feel the heat in the wake of strong competition from Honda, which is aggressively expanding its capacities. With three new launches expected this year from Hero in the form of 110cc Passion XPro, Ignitor 125cc and a scooter Maestro, and the recent launch of Impulse, we slightly increase our FY12E/FY13E volume expectations at 15%/10% respectively from 14%/9%. We do not see a significant scope for realizations to grow in wake of competition as market share retention will be the main aim.

Margins come below our expectations as staff cost rise and rupee depreciates

In spite of commodity prices going down, Hero was unable to fetch the benefits of the same in this quarter, as rupee has depreciated significantly vis-à-vis Japanese yen. Since Hero imports ~17% of RM from Japan, this impact was felt a bit too much. Also, employee costs increased 11% qoq, due to wage hike taken in August getting reflected in this quarter. Excluding royalty, margins came in at 15.6%. However, we consider royalty in other expenses, due to which our EBITDA margins came in at 11.9% considering royalty outgo of Rs2280 mn which has increased over the previous quarters due to yen appreciation. Margins have come below our expectations. Going forward, we expect HMCL to post improving margins of 12.1%/13.2% in FY12E/13E as commodity prices start showing their impact as rupee has started showing some strength vis-à-vis foreign currencies.

Outlook and valuation

In view of good show in the domestic markets and increasing the market share, we have slightly increased our volume estimates. We believe new launches also will support the domestic growth of Hero. However, rapid expansion of Honda and overall slowdown in the 2wheeler market will arrest a strong growth in market share, due to which we believe the volumes will not grow above 10% in FY13E. On margin front, we are maintaining our margin estimates as we believe FY 13 will show margin improvement of up to 100bps as raw material prices are slowing down, but at the same time, low price new launches will lead to an adverse product mix, thus capping realization growth. We value the stock at 14x times FY 13E EPS of Rs142.5, due to its market leadership position and domestic strength. Due to expectations of slightly better domestic volume performance, we are increasing our target price to Rs 1996. At CMP of Rs1945, we see a very limited upside of 3%, due to which we reiterate our Neutral rating on the stock.

Indian Railway Finance Corporation Ltd" (IRFC) - Better than your Fixed Deposit

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We are pleased to present you the confirmed details of Public Issue of “AAA” Rated, TAX Free, SECURED, REDEEMABLE Bonds issued by “Indian Railway Finance Corporation Ltd” (IRFC). This issue is opening on January 27, 2012. These bonds have been assigned a AAA rating by CRISIL, CARE & ICRA and also carry an attractive 8.15% (for 10 years) and 8.30% (for 15 years) tax-free returns. As the interest income is tax free, the pre-tax yield works out to around 11.80 – 12.01% (for individuals in the highest tax bracket).

Note: This is not 80CCF Infrastructure Bond.

Terms of the Issue :

               

Particulars	IRFC TAX FREE BONDS
Issue Size	Rs. 5000 Crores
Issue Opening Date	27TH  January 2012
Issue Closing Date	10th Feb 2012
Rating	“AAA” by CRISIL , CARE & ICRA
Minimum Application	***
Tenure	10 Yrs (No Lock-In)	15 Yrs (No Lock-In)
App More than Rs. 5 Lakhs( QIB, HNI & Corp)	8.00% p.a.	8.10% p.a.
App Upto Rs. 5 Lakhs ( Retail & HUF)	8.15% p.a.	8.30% p.a.
Face Value of Bond	Rs.1000
Listing	Proposed to be listed both in NSE & BSE
Interest payment	PAYABLE Annually Only
Issuance	Demat as well as physical

Pre – Tax Yield Calculation :

Particulars	10 Years	15 Years
Tax-Free Yield	8.15%	8.30%
Pre-Tax Yield
Individuals (tax @ 30.90%)	11.80%	12.01%

This issues is opening on 27^th Jan for subscription & will be closed soon.

Buy Reliance Capital; Target :Rs 466 :ICICI Securities,

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S t a k e   s a l e   p r o v i d e s   v a l u a t i o n   m o m e n t u m …
Nippon Life Insurance has agreed to buy a 26% stake in Reliance Capital
AMC at | 1450 crore ($290 million). Reliance Capital AMC is the second
largest AMC in India with an AUM of | 83,206 crore as on January 12,
2012. The AMC continues to be a top contributor with 86% share in the
consolidated PBT (| 75 crore in Q2FY12) of Reliance Capital as other
businesses continue to make marginal profits or have losses. As of now,
Reliance Capital has 93% ownership in Reliance AMC whereas 5% is held
by Eton Park, acquired in 2007.
Nippon Life manages assets of over $600 billion. It is one of the largest
FDI  in  the  Indian  mutual  fund  sector till date and its second investment
after deploying funds in Reliance Life in 2011.
We maintain our BUY rating on the stock with a target price of | 466.
ƒ Valuation seems attractive …
The valuation done at ~| 1450 crore for a 26% stake in the AMC
pegs the company’s worth at | 5600 crore ($1.1 billion). The current
market capitalisation of the consolidated Reliance Capital entity is |
8142 crore, pegging the AMC’s business share at 68% of the current
total market cap and | 211 per share of Reliance Capital.
Nippon  Life  seems  to  have  valued  Reliance  Life  at  6.7%  of  the
current AUM, which is higher than deals done in the recent past. We
believe that as Reliance AMC’s equity  proportion  is  higher  at  32%,
the valuations are fair. The Nomura-LIC AMC and L&TCholamandalam deals were fairly cheap between1.5% and 5.7% of
AUM due to their lower equity proportions and smaller AUM sizes.
We have assumed an 18% increase in FY13E AUM to | 1,05,948
crore, against a 12% dip in  FY12E AUM from FY11 AUM of |
1,01,600 crore. Based on FY13E estimates, we have valued the AMC
at 5% of AUM to | 200 per share.
Exhibit 1: AMC P&L
Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 YoY (%) QoQ(%)
Gross Income 164.2 177.3 177.3 185.7 167.4 163.1 -8.0 -2.6
PBT 57.7 70.0 91.3 52.6 70.9 65.6 -6.3 -7.4
Source: Company Quarterly Presentation, ICICIdirect.com Research
We expect Reliance AMC to report a profit | 211 crore for FY13E and |
178 crore for FY12E based on expected AUMs. We have not factored in
capital gains arising from the current AMC stake sale as the transaction is
subject to regulatory approvals and there remains uncertainty of year in
which gains will be booked.
Exhibit 2: Deal at current AUM levels (12
th
 January,2012 – closing AUM)
(| crore)
Current AUM' 83206
Value for 26% stake 1450
Value derived for 100% stake 5577
Valuation as a % oF AUM 6.7
Value per share of Reliance Capital (Rs) 211

Source: Company, ICICIdirect.com Research

Bajaj Auto - Domestic volumes weak, margins impress:: LKP

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Weakness in domestic markets leads us to cut volume targets

With domestic volume growing by just 7% YTD due to demand softness and
competition, Bajaj Auto reported a qoq decline of 4% in topline at Rs50.6bn,
while on a yoy basis, this was 21% up. Domestic total volumes declined by 6%
qoq to 6.94 lakh units, as the two wheeler market started facing a slowdown
from November end. December numbers of the company were significantly below
our expectations. Higher cost of ownership clubbed with high interest rates
and rising fuel prices has been troubling the company. Due to this, we have
cut our domestic volume estimates for FY 12E/FY 13E to 2.83mn/3.01mn
respectively.

New launches in domestic markets and RE60 in export markets to help volume
growth in FY 13

Exports sales for the quarter were down 10% qoq considering competition in
markets like Africa from Honda and overall global demand softness. Exports
contributed 35% of sales this quarter and with expected launch of the
recently launched commercial 4wheeler RE60 in the Sri Lankan markets in May
2012 will help the company to increase the contribution of exports to total
volumes. With new launches of the high margin KTM bikes, Pulsar variant and
Discover variant in the ensuing quarters, we may witness Bajaj Auto
weathering the weakness in demand observed off late. We expect exports to
grow at 24%/18% in FY12E/13E to 1.49mn/1.77mn respectively and the total
volumes to grow at 13%/11%.

Robust margins assisted by weaker rupee, price hikes and easing RM prices

Bajaj Auto reported a solid 21% EBITDA margin during the quarter which was
an increase of 90 bps qoq and 70 bps yoy. This was mainly due to weak rupee
and impact of easing commodity prices (RM to sales was at 70.4% v/s71.4%
qoq). Also the company had taken price hike of Rs500 per vehicle in October
which helped them to obtain auto industry's highest margins globally. PAT
adjusted for derivative loss of Rs 589 mn came in at Rs8340mn, which was way
above our expectations helped by better than expected operating performance
despite volumes being weak. Tax rate was at 27% as against 28.5% qoq.

Outlook and valuation

Given the weak domestic performance by Bajaj Auto we are cutting our volume
estimates for the company while maintaining our margin estimates. In order
to quantify our caution on the stoxck, we are assigning a lower multiple to
Bajaj Auto at 13.5x from our previous multiple of 15x. We have cut our
earnings estimates by 4% each for the FY12E and FY 13E. With the price
correcting by ~23% in a quarter, the stock looks attractive from current
levels. At CMP of Rs 1467, the stock trades at 12.2x times FY13E EPS of Rs
120. With robust margin profile and opportunities in the export markets, we
prefer this stock over its peers. However, from CMP of Rs 1558, we believe
there is a limited upside for the stock. Hence, we downgrade our Bajaj Auto
to Neutral from BUY while reducing our target price to Rs 1645 (includes Rs
21 from KTM business value).

Buy Tata Motors; Target :Rs 241 :ICICI Securities,

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E x p e c t a t i o n s   s u r p a s s e d   a s   J L R   “ E v o q u e s ”
Tata Motors (TML) has been one of our conviction stocks. TML has
allayed all the fears of the analyst fraternity regarding growth prospects in
JLR due to a so called “imminent recession” in CY11. The JLR business
has witnessed strong volume growth (up ~24% YTD FY12 at 2,17,108
units) led by popular Land rover products (Evoque, RR-Sport) at 1,77,364
units, up ~34% YTD. We have taken cognisance of the new growth orbit
of LR products, which has beaten our estimates. Considering this and JLR
we are more hopeful of witnessing a better domestic MHCV performance
in FY13E contrary to market expectations. We believe steeper interest rate
cuts and higher focus on GFCF (contribution to GDP at six year low) by
policy makers will help in a pick-up of business climate by ~H2FY13E.
ƒ December 2011 volumes enter new orbit as “Evoque” ramps up
JLR reported all-time high monthly volumes of 30,981 units for December
2011, up ~45% with both Land Rover and Jaguar rising ~54% and 9%,
respectively. This has been accelerated by the first month of complete
global sales for “Evoque” of ~9,000 units. The geographical demand has
been fuelled by emerging markets like China, Brazil along with the
developed markets of the US. We believe any Euro zone volume
moderation will be easily overcome by strong emerging market demand.
We expect JLR to clock in excess of ~2,95,000 units for FY12E.
O u t l o o k   &   V a l u a t i o n
We remain positive on the long term outlook and expect to witness
upgrades both in terms of earnings and valuations for domestic as well as
JLR business. We have upgraded our SOTP target price of | 241 and have
a BUY rating on the stock. All portfolio investors with a two year horizon
who had averaged at lower levels are advised to keep holding positions.

Risk-reward ratio in favour of debt schemes: Saurabh Nanavati in Business Standard

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Indian Mutual Fund industry has failed to attract retail investors and situation does not seem to be improving. Despite several efforts from the regulator and the industry body Amfi, fund houses continue to find it hard to bring in retail money. Saurabh Nanavati, chief executive officer, Religare Mutual Fund, talks about fundamental problems plaguing the industry. He says that it's better to have less investors but with right reasons. Edited excerpts from a conversation with Chandan Kishore Kant

Why is the industry unable to attract retail money?Combination of factors is keeping retail away. We have very low level of financial literacy and this continues to worry in such volatile market conditions. Fundamentally, retail in India has always been taught that one should enter markets at times of initial public offers for equities or new fund offers in mutual funds at Rs 10 per unit or share and on listing, sell it. That's not right. Investors should fundamentally buy into a stock or a mutual fund because of the past track record, if convinced about the theme. Secondly, stay invested for a longer period. If one keeps doing ins and outs, I don’t think it is a good strategy to be adopted.

When do you expect retail investors to come back to equities?There is a big difference from investors' perspective. In 2008, deposit rates were five-six per cent and people yet came back to the equity markets in 2009 for a short span. However, right now, coming to equities is not in favour of retail. Unless, fixed deposit rates come at least below eight per cent - a trigger point, it's hard to see retail coming back to equities. Safe return of 8-8.5 per cent is a big psychologically benchmark in retail investors' mind-set.

What went wrong? Are lessons learnt now?Money is there with people, no doubt about it. However, statistics show that fresh money is fundamentally received through new launches. In other competitive financial products too, half of the folios or policies are getting lapsed after three years. Why? Because they have been wrongly sold. These are serious issues. The regulator is playing its role and we as a industry need to play our role. What I believe as an asset manager is, it's better to have two investors coming in for a right reason than 10 investors coming for a wrong reason. Else, we are not building up a good base. Unfortunately, we have never spoken about it for past years in our markets, both equity and mutual funds. We will go through these years of pain, which is a transition phase, before we see brighter future and investors come with a right reason.

Investors in equity mutual funds are not making money. Is debt category getting dominant? True. Even, people investing through SIPs for last five years are making negative returns. This way, retail investors will not have confidence. On the other hand, with 10 per cent return in banks' fixed deposits, why would he take risk by investing in equities? In current scenario, equities may promise 12 per cent positive returns as well as negative returns too. The risk-reward-ratio is clearly in favour of debt schemes and FDs, that’s why last two year’s retail has been systematically moving towards debt. Clearly, debt is a no brainer for the Indian investors at this point of time.

How do you see this year panning out for the mutual fund industry? Next one year is going to be tough. Last two months were probably the worst months and the trend is yet on the decline. It definitely looks like this slowdown will continue for at least next six months, both from the markets' perspective as well as clients' perspective. We are grappling with lot of regulatory changes, which have come up in a short span of time. This has thrown the industry's and the distributors’ business model out of gear in terms of acclimatising to new norms. Most important is what course of action our government takes on policy decisions.

OIL & GAS :: Q3FY12 RESULTS PREVIEW: Kotak Securities

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OIL & GAS
Key highlights
The performance of oil and gas companies in Q3FY12 is expected to be
mixed.
Upstream companies are expected to benefit from higher crude oil prices
and weaker rupee. The upstream oil majors will see higher realizations as
the average rupee-dollar rate was 50.88 for the Dec'11 quarter, down 13.5%
compared with the year-ago period. Cairn India remains our top pick.
However, we can see some more one-time impact on its profitability in
Q3FY12.
In Q3FY12, Brent crude oil touched a high of USD$116/bbls but later settled
to USD$ 108.68/bbls (30th Dec '11), which is 2.23% higher from the end of
Q2FY12. However, due to various geo-political issues the crude oil again
surged and is currently trading ~USD$113/bbls (spot). Brent crude
throughout the quarter was trading above USD$103/bbls and averaged to
$110/bbls in Q3FY12 which is positive for private oil exploration companies
like Cairn India, etc. Further, if Iran closes the Strait of Hormuz partly or
fully it will lead to a major spike in crude oil prices.
On the other hand, downstream companies i.e. refining and petrochemicals
are expected to witness margin pressure due to lower global demand and
higher raw material prices. Further, OMCs fate depends on how much the
government compensates for the under-recoveries. OMCs are currently
(effective 1st January, 2012) incurring daily under-recovery of about Rs. 3880
Mn on the sale of Diesel, PDS Kerosene and Domestic LPG.
The natural gas industry is expected to continue its steady pace as domestic
availability of gas remains tight. Due to limited natural gas availability in
India we can see volume pressure on gas utility companies such as GSPL,
IGL, etc. However, PLNG is expected to benefit from fall in the KG-D6 natural
gas supply. It is also expected that around Feb'12 the global LNG prices
should cool off partly to seasonality factor and partly due to higher global
supply.
The domestic natural gas supply was lower due to decline in natural gas
production from KG-D6. This will not only negatively impact the
performance of RIL but will also impact gas-utility companies such as GSPL,
GAIL, Gujarat Gas, etc. However, part of the gas volume loss was
compensated by higher import of LNG by PLNG.
Finally, we expect upstream companies to report strong growth in revenues
in Q1FY12 mainly on account of rise in crude oil prices. Gas utility
companies can see some volume pressure on account of lower domestic
natural gas supply. At the same time, the raw material cost will be higher as
part of the gas supplied was costly imported LNG which will have negative
impact on the profitability margins.
Companies
n Indraprastha Gas (IGL). We expect IGL to show decent volume growth YoY
basis mainly due to major conversion of vehicles to CNG. However on QoQ basis
the volume performance will be flat and the margins are expected to be under
pressure due to sourcing of costlier natural gas, weak rupee and increase in operating
cost. Recently, IGL has raised prices of CNG by Rs.1.75/kg in Delhi (Rs.2/
kg in Noida). CNG will now cost Rs.33.75/kg in Delhi and Rs.37.9/kg in Noida,
Greater Noida and Ghaziabad.

MEDIA :: Q3FY12 RESULTS PREVIEW: Kotak Securities

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MEDIA
Q3 FY12 shall see modest topline growth, on the back of a strong base, as
well as weakness in consumption and (in part, consequently) advertising
intensity. Advertising expenditures have been particularly weak from the
real estate and BFSI sectors in the recent past, and this trend is expected to
continue in 3QFY12. We believe demand from FMCG advertisers is likely to
have been firm this quarter. Expenditure growth from local advertisers is
likely to stay stronger than national advertisers. We expect newspaper
publishers in our coverage universe to have advertising revenue growth in
the range of 8-10% in the quarter. Although overall industry growth among
TV broadcasters is likely to have been in high single digits, we think that
the emergence of Sony at #2 is likely to have an impact on Hindi GECs.
Similarly, we believe higher competitive intensity in radio broadcasting is
likely to impact growth of ENIL. Overall, we estimate 7.3% y/y growth in
revenues of our media coverage universe.
Raw Material expenses shall continue to exert downward pressure on
newspaper publishers' margins. Domestic newsprint prices have remained
firm in the quarter (in line with 2QFY12), and while imported newsprint
prices in Indian currency would be higher, they are unlikely to have a major
impact in this quarter (HT Media, the most exposed company in our
coverage universe, has inventory at lower prices, and other publishers have
a low usage of imported newsprint). Expenses of broadcasters (ex-sports)
are likely to have risen stronger than revenues, either on account of higher
programming expenses, or marketing and distribution expenses, in an
environment of rising competition.
We expect average EBITDA margin in our coverage universe to decline 3.6
ppt in the quarter (y/y). On the back of these, we expect earnings de-growth
of 16% (y/y) in the quarter.

SHIPPING :: Q3FY12 RESULTS PREVIEW: Kotak Securities

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SHIPPING
q The dry bulk market is persistently facing problem of oversupply of ships
pegged at 10 to 12% per annum (Gross supply of 196 mn tonnes (December
2011) in the next 3 to 4 years) and that is putting the various Baltic
Indices and freight rates under pressure. However the month of October
and November 2011 saw the Baltic Index remaining flat. The cape Index
gained almost 10% QoQ. This was because of increased imports by
China of iron ore and coal in the months of November and December.Lot
of activity was reported in the spot cargo for larger ships in November
which led to freights increasing by 15 to 30% on different cape routes.
Little activity was seen in the Panamax, Supramax and the Handymax
segments, not enough to boost sentiment and freight levels in the quarter.
The orderbook to fleet ratio currently stands at 34% - down from 37
% in Q2FY12 and 52% in December 2010 which is positive for the sector.
q The oversupply of vessel is a serious concern even in the crude tanker
market. However activity in the current quarter increased tremendously
due to winter in the west which helped the tanker segment do well in
Q3FY12. Both the Baltic clean tanker index and Baltic dirty tanker index
surged by ~40% in the quarter which would help ships in the spot market.
It is important to note that Q3FY12 is usually good for the tanker
segment.
q Sluggish world economy, slowing consumer demand, debt crisis in Europe
and burgeoning order book is putting pressure on the container
market was weak. The market was weak in Q3FY12 and down 20% QoQ
and is estimated to remain flat in near term.
q Second hand shipping asset prices have slipped by 5 to 25 % across segments
(especially tanker segment) impacting the NAV and replacement
cost of most of the companies.
q Higher bunker cost is also having a negative impact on the companies.
Shipping Corporation of India (Reduce: Target Price - Rs 60)
n We expect SCI's Q3FY12 revenues to increase 3.5% YoY and increase 1.5%
QoQ to Rs 9,200 mn, led by strong tanker market. The impact of the strong
tanker market won't be significant for the company as the company has more
than 65% of the ships on long term charters.
n Operating profit is expected to fall considerably to Rs 610 mn which translates
into an operating margin of ~7 %, falling almost 1100 bps YoY from ~18% primarily
due to higher bunker cost and subdued freight market.
n Net profit is expected at Rs 350 mn against loss of Rs 1408 mn in Q2FY12 and
profit of Rs 1,230 mn in Q3FY11. The YoY fall would be primarily due to poor
freight market, lower gains from sale of ships and higher interest impact this
quarter vs. last year.
n As asset prices have corrected QoQ, we also estimate the gross NAV of the company
to have corrected from Rs 120 in September quarter to around Rs 90 in the
current quarter.
Great Eastern Shipping Co (Accumulate: Target Price -Rs 315)
n Q3FY12 consolidated revenue is expected to increase ~24 % YoY and remain
flattish QoQ to Rs 6,900 mn, primarily due to strong tanker market. Even the
offshore segment is expected to do well in the quarter with Brent crude sustaining
above $100 per barrel in the quarter.
n Operating profit is expected at Rs 2750 mn which translates into an operating
margin of ~40 %. Despite high bunker and insurance cost we expect the company
to report healthy operating profit as the company has almost 50% of its
tanker fleet in spot market. We also expect the offshore segment to do well in
the quarter.

Logistics :: Q3FY12 RESULTS PREVIEW: Kotak Securities

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LOGISTICS
Logistics - Port volumes at 12 major ports in Q3FY12
Performance of Logistics companies involved with container rail business,
CFS business and related business is strongly linked to performance of the
port sector in the country. With the total port volumes in Q3FY12 at the 12
major ports of the country estimated at 150 mn tonnes (+3% YoY) and
container volumes estimated at 1.95 mn TEUS ( +3% YOY) and minor ports
like Mundra estimated to grow much faster (14% YoY), we expect the
Logistics companies in our coverage to report healthy growth in Q3FY12
(except Concor).
Container Corporation of India (Accumulate: Target Price - Rs 950)
n Q3FY12 consolidated revenue is expected to increase ~ 7 % YoY and increase ~
5% QoQ to Rs 10400 mn, almost 2 x the growth in volumes at major ports. It is
important to note here that Concor primarily operates in Exim segment out of
JNPT.
n The domestic volumes of the company are estimated to report a YoY drop of
~5% in volumes. In the previous quarter Concor had reported a ~14% YoY
decline in domestic volumes primarily led by new railway policy effective Dec-
2010. Railways increased the specified rating of five commodities (cement, stone
other than marbles, iron & steel, alloys & metals, POL products) leading to higher
haulage by 100% to 275%. This led to Concor losing almost the entire volumes
of these commodities to road transportation. However the company has taken a
lot of steps to arrest the decline of volumes of these commodities.
n Operating profit is expected at Rs 2810 mn which translates into an operating
margin of ~27 %, declining almost 190 bps YoY from 28.90% primarily due to
increased competition in the Exim segment (waning pricing power) and higher
haulage cost in domestic segment (not completely passed to customers till date).
n With the company having a huge cash reserve of over Rs 23 bn which the company
has primarily invested in debt securities and with interest rates moving up,
we expect the other income of the company to be healthy in the current quarter
at Rs 750 mn versus Rs 479 mn in Q3FY11.
n Net profit for Q3FY12 is expected at Rs.2400 mn against Rs 1754 mn in Q2FY12
and Rs 2295 mn in Q3FY11.
Gateway Distriparks Ltd (Buy: TP - Rs 160)
n We expect GDL's Q3FY12 revenues to increase ~26% YoY and increase ~6%
QoQ to Rs 1952 mn. This we believe would be largely led by congestion at JNPT
and Chennai port (it leads to higher CFS volumes and realization) and improved
load factor in the rail business.
n The rail business is expected to report healthy load factor of 82% (previous year
78%) with operating margin of 17%. This would be fourth consecutive quarter
for the rail business to report profits at net level.
n With improved CFS realizations (YoY) and robust rail performance we expect
GDL to report operating profit of Rs 675 mn which translates into an improved
operating margin of ~35 %, improving almost 600 bps YoY from ~ 29%.
n Net profit is expected at Rs 345 mn versus Rs 335 mn in Q2FY12 and Rs 280 mn
in Q3FY11.

CONSTRUCTION :: Q3FY12 RESULTS PREVIEW: Kotak Securities

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CONSTRUCTION
Construction sector performance during Q3FY12 is expected to improve on a
sequential basis led by improvement in execution. Revenues are expected to
grow by 17% QoQ for construction companies in our coverage universe
while on yearly basis, revenue growth is expected to grow at a slower pace
of 15% due to lower than expected revival in order inflows during current
financial year. Though margins are expected to remain stable but steep
increase in working capital requirements as well as borrowings are expected
to dent the profitability on yearly basis. In terms of order inflow, building
sector continued to witness improved activity while traction has improved
for road sector also in current fiscal. However, sectors such as power,
mining, irrigation and from international segment continued to witness
lackluster activity.
Order inflow was expected to improve during FY12 but it has failed to
revive across sectors and has impacted revenue growth. Along with this,
some companies have witnessed slowdown in execution due to very high
interest rates or lack of funding to achieve financial closure. We thus expect
revenue growth for the sector to witness significant improvement only after
we witness revival in order inflows as well as decline in interest rates.
Following are the key parameters which we would look out for during
Q3FY12 and which will give us an indication of future growth in the sector
q Faster environmental clearance and land acquisition
q Improvement in order inflows across segments
q Decline in interest rates
q Fund raising or stake sale by companies at the SPV level
q Financial closure of pending projects
Till that time, we continue to remain selective on the sector and would
prefer companies with healthy order book, improved execution and
attractive valuations. We would thus prefer IRB Infrastructure, Unity
Infraprojects and Pratibha Industries.
Key highlights during Q3FY12
Revenue growth to witness improvement on sequential basis
Revenue growth of the companies during Q3FY12 is likely to be led by ramp up in
execution after witnessing lull in H1FY12. However, revenue growth is not expected
to jump up sharply despite healthy order book for the companies in order to contain
working capital cycle and maintain balance sheet strength. It is expected to grow
by 15% YoY only for our coverage universe.
Operating margins to stay strong
Operating margins of the companies are expected to be a mixed bag depending
upon the contracts executed in the current quarter. We expect full year FY12 operating
margins to come down by 25-50 bps in comparison with last year due to increased
competition as well as higher raw material prices for fixed price proportion
of order book. Along with this, margins may also come down due to change in the
revenue mix.
Net profits to be impacted by higher interest outgo
Aggregate net profit of companies in our coverage universe is expected to decline
by 6% YoY for Q3FY12 led by steep increase in interest outgo. Companies were
planning to raise funds by selling stake in SPV's to meet the equity requirement of
new projects and to repay high cost debt. However, due to lack of fund raising during
Q3FY12, borrowings and working capital cycle may continue to remain high and
thus interest outgo is also expected to remain high for H2FY12. This will impact the
net profits adversely.

FMCG :: Q3FY12 RESULTS PREVIEW: Kotak Securities

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FMCG
n Godrej Consumer: We estimate Rs 12960 mn in revenues in 3QFY12, including
Rs 1100 mn from the acquisition of the Darling Group. Excluding the Darling
Group acquisition, we expect sales to register growth of 21%, on the back of
continued benefits of enhanced distribution, and launch of new products. We estimate
EBITDA margins of 19%, on the back of stability in gross margins (q/
q)and rationalization in advertising and distribution spends. Interest expenses are
set to rise on account of the Darling acquisition. PAT growth is estimated at 26%
y/y.
n ITC Ltd: We expect cigarette revenues to continue registering high growth
(15%, likely 6-7% growth in volumes), leading to 14.5% y/y growth in revenues
for the quarter. Expect further improvement in cigarette margins on account of
improved pricing (Navy Cut price hikes, affected August, are likely to have an
impact in the quarter). We expect the improvement in other FMCG margins to
continue. EBITDA Margin for the company is estimated at 37.3%, a minor improvement
of 0.1 ppt. We expect PAT growth of 14% y/y for 3QFY12.

METALS & MINING :: Q3FY12 RESULTS PREVIEW: Kotak Securities

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METALS & MINING
Steel
n Global steel capacity utilization levels during Q3 stood at sub 80% levels. Slowing
global economic growth would imply continuance of the trend in near term
and any significant improvement in steel prices is unlikely despite strong seasonality
in Q4FY12.
n Slowdown in awarding of infra projects,high interest rates and falling capex has
badly hurt Indian steel demand to <3% Y/Y growth levels in FY12 vs. >10%
CAGR for last couple of years. However, domestic steel prices have been reasonably
stable due to fall in supply from Karnataka region which accounts for over
20% of Indian steel production. Global steel prices did correct > 10% in Q3 but
the rupee depriciation of 11% during Q3, has prevented much of the pressure
from imported steel.
n Essar Steel has just ramped up its production capacity by 6mt to 10mt at Hazira.
Further, 3mt of Tata Steel capacity commissioning is likely in Q4FY12 while few
other steel companies are closer to commissioning which is likely to lead to glut
of domestic supply in FY13e and put pressure on domestic steel prices in FY13e.
Raw materials/ Mining
n China's total crude steel output likely rose 9.2% in 2011 to 683mt as per estimates
from CISA. Import prices for iron ore averaged $166.2/t in the first 11
months of CY11, up 31.5% Y/Y. However, turbulence was seen in Q3, with iron
ore prices crashing by 30% in Oct 11 before recovering by 10% and sustaining at
those levels since Nov 11. Presently 62% Fe grade iron ore export prices to
China are trading at ~139$/t CIF and 58% Fe grade prices are trading at $125/
t CIF. Average iron ore prices were down 20% Q/Q during Q3.
n Quarterly contract prices for hard coking coal saw a downward trend throughout
FY12. Starting Q1 at US$ 330/t FOB, Q2 was marginally lower (4.5% Q/Q) to
US$ 315/t FOB, Q3 fall accelerated to 9.5% Q/Q to US$ 285/t FOB. Now Q4
contracts have been settled at US$235/tonne FOB Australia sharply down by
16.1% Q/Q. However, INR has depreciated vs US$ by 11% during 3QFY2012,
which will limit the benefit of lower coking coal prices for domestic steel companies.
The leftover lower cost benefit would flow into P&L of steel companies with
a quarter lag as always.
n Shift from UHV to GCV coal pricing by Coal India will raise cost for captive
power and sponge iron production by Rs.100-200/t for E and F grade per ton of
linkage coal. This will increase the cost of production of aluminum by US$ 30-50/
t and of sponge iron by US$4-6/ton. Though the shift was announced from 1 Jan
2012, there are indications that price increases might be deffered for time being.
Base metals
n Average LME aluminium prices for Q3 were sharply down 12.7%Q/Q and
10.6%Y/Y. Average aluminium inventory at LME was up 7.9%Y/Y and up 2.2%
Q/Q.
n Average LME copper prices for Q3 were sharply down by 15.8%Q/Q and
12.7%Y/Y. Average copper inventory at LME was up 13.2%Y/Y but fallen
sharply by 11.2% Q/Q.which is the only silver lining.
n Average LME zinc prices for Q3 were sharply down by 15%Q/Q and 17.9%Y/Y.
Average zinc inventory at LME are up 21.8%Y/Y but again like copper down
sharply by 9.8% Q/Q.
n As base metal price correction was severe only towards end of Q2, earning impact
would be felt primarily in Q3 results. But US$ appreciation of over 10% vs.
INR would protect the fall in earnings to some extent. Cost pressure from higher
coal prices are irreversible barring seasonality additional impact in Q2. Operating
margin contraction would be glaring on Y/Y comparison in Q3.

CAPITAL GOODS & POWER :: Q3FY12 RESULTS PREVIEW: Kotak Securities

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CAPITAL GOODS & POWER
The capital goods index has continued to lose momentum into the third
quarter of FY12. Few pointers.
q IIP for October 2011 reported a contraction of 5.1%. The performance of
capital goods index was even worse.
q Project investment intentions through fresh proposals declined by a
hefty 62% during the first half of 2011-12 on a Y-O-Y basis. According to
a project survey, 3,858 new projects were announced during April-September
2011 envisaging capital outlay of Rs.1.3 trn as compared to 4930
new projects amounting to Rs.3.5 trn in H1 FY11.
q More worryingly, big ticket projects in crucial sectors like Electricity and
Metals & Minerals, have taken a big hit. Apparently, worsening investment
climate, including consistent hikes in policy rates by the RBI
coupled with fuel supply bottlenecks, policy stalemate has contributed
to the deceleration in project activity.
q Major capital goods players have pointed out that apart from the policy
related bottlenecks, higher interest rates are resulting in longer project
finalisation cycle.
Preview Highlights
n We expect aggregate revenue growth of 14% YoY in the third quarter, driven
mainly by BHEL and L&T.
n Aggregate EBITDA is expected to grow at a lower pace of 7% yoy as we project
aggregate EBITDA margins to contract by 70 bps to 12.7%. Aggregate PAT is
expected to grow 11.6% YoY in Q3 FY12.
n We remain cautious on projects-based companies given the negative outlook on
capex cycle and a deteriorating working capital cycle. Interest expenses are seen
spiraling up in this quarter as well.
n While valuations are now reasonable from a historical perspective, we note that
the sector remains vulnerable to earnings downgrades. Remain selective in our
stock picks with preference for product-oriented companies over project-oriented
ones. Prefer Havells India, Greaves Cotton, Bharat Electronics.
Stock Performance
The capital goods sector remained underperformer for the quarter. Weak order intake
and elevated material prices were among the major concerns, which led to the
derating of sector. Sector heavyweights, L&T and BHEL lost a chunk of their value in
the quarter.
Commodity prices soften in Q3FY12 but benefits to be partly offset
by depreciation in rupee.
During the quarter, average price of HR steel coils was up 4.5% yoy to USD 706 per
ton. However on a sequential basis, HR coil prices have eased by 10% qoq. If the
trend in easing of commodity prices continues, then it could come as a respite for
equipment manufacturers.
Average price of copper which is the prime raw material for electrical equipment
has declined 14% yoy in the quarter. The effect of this would be in terms of lower
revenues but upside in EBITDA margins coupled with reduced inventory holding cost.

BANKING & NBFCS Outlook: :: Q3FY12 RESULTS PREVIEW: Kotak Securities

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BANKING & NBFCS
Outlook: Neutral
q During Q3FY12, core income for Banks & NBFCs under our coverage is
expected to register a growth of 13.1% (YoY). Our private banking universe
is likely to grow faster at 15.5%, while PSU banks under our coverage
is likely to grow at 12.8%. During the same period, NBFCs are likely
to grow at 9.2%. Net profit for Banks & NBFCs under our coverage is
likely to be more moderate at 10.6% growth (YoY) mainly on back of
subdued non-interest income.
q Credit growth saw marginal drop to 17.2% YoY (as on December 16,
2011) as against 17.8% witnessed in prior fortnight (December 02, 2011);
however, it was lower than 23.8% growth witnessed a year ago. Growth
in deposit mobilization has overtaken the loan growth during last two
quarters; came at healthy levels (18.2% as on December 16, 2011) as
against 14.8% witnessed a year ago.
q We expect marginal compression in NIM (8-10bps) during Q3FY12 (QoQ
as banks are almost through with the last leg of deposit re-pricing at the
meaningfully higher levels.
q We believe asset quality pressure to persist even though banks have already
shifted to system based NPA recognition system. We expect restricted
book to rise especially on corporate book side as there has been
large addition to the CDR in recent times. However, banks are likely to
report higher recovery/upgradation as banks are already through with
the transition exercise.
q 10-Yr G-Sec yield has moved up marginally during Q3FY12 and hence
banks are likely to report marginal MTM depreciation on their investment
book. We also expect moderate growth in non-interest income for banks
under our coverage due to muted treasury profit along with lower 3rd
party distribution income.
q Top Picks: HDFC Bank, ICICI bank, SBI and BoB
Core income expected to grow at 13.1% for banks & NBFC under
our coverage; net income growth is likely to be more moderate
During Q3FY12, core income for Banks & NBFCs under our coverage is expected to
register a growth of 13.1% (YoY). Our private banking universe is likely to grow
faster at 15.5%, while PSU banks under our coverage is likely to grow at 12.8%.
During the same period, NBFCs are likely to grow at 9.2%.
Net profit for Banks & NBFCs under our coverage is likely to be more moderate at
10.6% growth (YoY) mainly on back of subdued non-interest income.
We expect HDFC bank and PNB to deliver relatively better numbers in our banking
space. Similarly in NBFC universe, we expect IDFC (on back of sale of AMC business)
and M&M Finance (on back of robust business growth) to deliver better bottom
line growth.
Credit growth saw some marginal drop vis-à-vis last fortnight;
growth in deposit mobilization has overtaken the loan growth
during last two quarters.
Credit growth saw marginal drop to 17.2% YoY (as on December 16, 2011) as
against 17.8% witnessed in prior fortnight (December 02, 2011); however, it was
lower than 23.8% growth witnessed a year ago.