NIIT Technologies :: Prabhudas Lilladher MID-CAP top pick

TTL – Size & agility and room for positive surprise: The company has a
niche presence in Travel, Transportation & Logistic (38% revenue). A
specialized presence in the segments and small size gives room for strong
growth. It is rated as one of the most preferred vendor in the space. We
are factoring in modest growth expectation of 2.8% CQGR over the next
five quarters, despite reporting strong growth of 9% CQGR over the last 12
quarters.
Insurance – IP led growth in non-life market: NIIT Tech derives ~36% of
revenue from BFSI sector, led by 27% from Insurance. The company’s IP
(ROOM Solution) in general insurance gives them unique capability to
drive growth ahead of peers. The revenue growth has been steady at 6.5%
CQGR over the last seven quarters. We expect stronger growth for
Insurance than overall growth, yielding positive surprise on operating
margin.
Order book strength to give revenue visibility and margin stability: Order
book to be executable over next 12 months grew by 20% YoY to $240m
(@cc $254m, 27% YoY). The strong growth in order book led by fresh
order intake ($83m) improves the revenue visibility for the company for
FY13. Moreover, the management highlighted limited scope of pricing
discussion on existing order book. Hence, we see stable margin
performance with steady revenue growth beating NASSCOM growth
outlook of 11-14% YoY growth.
Valuation and Recommendation – BUY with Target Price Rs 350: NIIT
Tech is a unique IT services provider for TTL and Insurance sector (non-life)
with a 28-year heritage. NIIT Tech is best positioned in the niche IT space
to meet or exceed our above consensus forward estimates and grows
faster than peers. With a P/E multiple of 6.5x, is at steep discount
compared to the peer group, moreover with a predicted EPS growth CAGR
of 16%, the valuation looks compelling.

Buy Axis Bank :: Prabhudas Lilladher

Valuation discount on asset quality concerns seems exaggerated: We
believe the street is assigning discount valuations to AXIS v/s peers, given
the latter's high exposure to SME book (~20%). However, asset quality
trends exhibits much better underwriting standards at the bank as against
the PSUs. Though asset quality concern arising from the relatively
unseasoned power exposure remain, low CDR pipeline and strong asset
quality show in H2FY13, imply limited negative surprise on asset quality in
the near term.
High return ratios to sustain: Axis Bank’s ROAs improved significantly
between FY08-11, driven by improving margins and strong fee income
growth. Though the fee income has shown signs of moderation, we expect
the ROAs to sustain at >1.5% led by stable growth in core income, stable
opex and manageable asset quality.
Valuations: Current valuations are trading at 1.65x FY13 book. Though
restructuring and rating data suggest some inch‐up in asset quality stress,
we believe stress levels are manageable (net slippages of <1 a="a" e="e" have="have" p="p">Sep-13 target of Rs 1,350 per share, implying FY13 P/B of 2.1x.

Persistent Systems :: Prabhudas Lilladher MID-CAP top pick

Ramp-down from clients are bottoming out: Persistent witnessed rampdown
from top clients due to end of projects and M&A activity (of clients).
Top clients, whose projects got shelved after acquisition, are already
captured in quarterly run-rate. Moreover, due to project completion with
other top-client, we may see some spill-over in Q2FY13. Nevertheless, the
company is working with the same client on other projects to back-fill the
gap. Hence, we expect it to recoup some of the negative impact.
New deal wins to offset deceleration: The management is very confident
of demand environment. The company has signed a large deal (end of lifecycle)
with one of the top clients. Also, new engagements with clients
(acquired from Openwave location based service product) are likely to
pick-up.
Growth outlook strong, margin to see uptick in H2FY13: The management
is confident of improving the growth rate and achieving better than
NASSCOM guidance of 11-14% YoY growth, but didn’t quantify the
guidance. The margin outlook for Q2FY13 continues to be weak due to
wage hike (Offshore: 9.9%) and full impact of S&M investment, which is in
line with our hypothesis. However, the management is confident of
recouping the margin in H2FY13. We expect margin performance in
H2FY13 to get boosted by revenue growth from IP, cost absorption of
wage hike and replacing attrition employees with the fresher (Fresher
addition: 1350).
Improving free cash flow conversion: As the company comes out of the
investment phase, FCF conversion is likely to improve. The earlier guidance
of Rs115cr included some expansion (land deal) that is likely to be
postponed. Hence, we expect FY13 FCF/EBITDA conversion to 67% (FY12:
7.4%, FY11:55%).
Valuation and Recommendation – BUY with a revised target price of
Rs460: We believe the option value of IP sales along with success of “Sell
with Partner” could spin a positive surprise. Currently, Persistent is traded
at 8.6x FY13E earnings estimate with 20% earnings CAGR (FY12-14E).

Buy Power Grid Corporation:: Prabhudas Lilladher

Increasing capitalization to drive earnings: We expect capitalization to
increase to Rs167bn in FY17E from Rs71bn in FY11 and regulated equity base
to increase by 2.6x to Rs435bn in FY17, resulting in earnings CAGR of 16%
over FY12-17E. The CWIP in balance sheet has also increased 2x to Rs266bn in
FY11 from Rs132bn in FY09, indicating higher capitalization over the next few
years. The management highlighted that it is highly focused on execution and
ambitiously looking at reducing CWIP in FY13 despite huge capex plans of
Rs200bn in FY13. This effectively means that the management is indicating
capitalization numbers of ~Rs200-210bn for FY13. PWGR reported
capitalization of Rs40.72bn for Q1FY13 . It has further capitalized assets worth
Rs10bn in July till date taking the total capitalization to Rs50bn. The
management had earlier indicated capitalization of ~Rs200bn for FY13 and
sounded confident and on track to achieve the same.
Trying to address investor concerns: PWGR, in its analyst meet, highlighted
most common concerns raised by the investors and put forward its point of
view on the same: (1) Dilution (it highlighted that PWGR can avoid dilution by
tweaking D:E ratio and working with lower than prescribed D:E ratio of 70:30
for 1-2 years) (2) Risk of lower RoE by regulator for next tariff period (it
highlighted that historically RoE for tariff period has been decided based on
prevailing SBI PLR in order period and current high PLR does not suggest a
case for lowering RoE in next tariff period) (3) Delay by IPP (it highlighted that
it has checks and balance at various stages to ensure synchronized
commissioning of line with generation and regulatory support in case of
unintentional delay beyond PWG control. (4) plans after XII plan capex (it tried
to give a flavour of likely capex in XIII and size and areas of opportunities in XIII
plan)
Relative a better bet: We believe PWGR remains the safest play in the Power
Utilities space which has been facing multiple issue of coal shortage,
deteriorating SEB finances etc. PWGR is immune to fuel risk and faces
relatively moderate land acquisition issues as compared to IPPs. We expect
the company to deliver 16% EPS growth over FY12-17E with core RoEs of
~17.6% over the same period.

KEC International :: Prabhudas Lilladher MID-CAP top pick

Diversified order book: Order book for the company stood at Rs92bn, up
16% YoY. Transmission line contributed 69.9% of the order book, Power
systems contributed 17.9% and other initiatives like Railways, Water etc.
contributed 12.2%. The order inflow for the quarter stood at Rs20bn (up
51% YoY); this is the third consecutive quarter with strong inflows. 24% of
the total order inflows came from its new business initiatives like power
system, cable, telecom and water segments. Transmission segment got the
biggest order worth Rs4bn from Kazakhastan. It managed to get orders
across segments and geographies. The diversified nature of order book in
across customers base and geographies gives it flexibility to cushion the
impact slowdown and make the most of up cycle.
New initiatives bearing fruits: KEC has taken up various new initiative over
the few years by getting into new business like sub‐station segment, water
business, Balance of Plant and railways. KEC has also entered in the CIS
region by securing the largest ever order of Rs9.42bn from Kazakhstan.
This order gives KEC an entry into 1150kV to 110kV sub-station at the
entire range. This new initiatives will secure the future growth of the
company as KEC has ambition to scale up each of this new business to
~Rs5-10bn in 3-4 years time. The contribution of orders from this new
business increased to 30% from ~21% at the start of FY11.
SAE tower: KEC acquired SAE tower in Sep 2010. The company has been
able to scale up the operation of SAE successfully, with revenue of Rs9.1bn
and order book of Rs7.5bn in FY12. It has also been able to maintain
EBITDA margin for SAE above 13%. SAE enjoys highest markets share in
Brazil, United States and Mexico. It will help KEC to scale up its presence in
this markets with high entry barriers successfully.
Valuation: We believe that strong order book, huge pipe line of orders and
ability to win orders in the current environment gives comfort on revenue
visibility. We expect the stock to post earnings CAGR of 15.5% over FY12-
14E. Improved working capital and debt management will help continue to
outperform.

Amara Raja Batteries :: Prabhudas Lilladher MID-CAP top pick

Fundamentals intact for the battery industry: We believe that the fundamentals
of the battery industry remains strong and we continue to remain positive on both
the battery companies. Post >25% YoY growth in FY10 and FY11 each, we expect
strong traction in high margin replacement segment (with sufficient pass-on
ability). Shift of shares from unorganized to organized within the replacement
market due to obligation on Exide/ARBL to procure a worn-out battery (source of
lead for unorganized segment) for every new battery sold. Shift to VRLA
technology in two-wheeler batteries is difficult to manufacture for the
unorganized players
Automotive Segment: 65% of automotive business comes from the replacement
market in terms of volume and about 35% comes from OEMs. In revenue terms, it
would be around 28% OEMs and the balance comes from the replacement
markets. The replacement market includes two brand sales which are ‘Amaron’
and ‘Power Zone’ as well as some private label opportunities.
Industrial Battery segment volumes up 15%: Industrial segment registered a
volume growth of 15%+ amidst very competitive market conditions. AMRJ has
gained market share in the both the segments of Telecom and UPS. AMRJ has
increased its market share to ~33% currently in UPS segment at the cost of the
importers in the unorganized market. With China levying a 17.5% export tax on
lead and lead products and rupee depreciating, it is unviable for the traders to
import the UPS batteries. This, together with higher demand in the commercial
UPS segment, augurs well for AMRJ.
Telecom vertical to grow at 6‐8% CAGR over next three years: Overall, the
Telecom Operators and Service Providers have shifted to one-on-one negotiations
with reliable vendors as against the earlier followed norm of reverse auction
mechanism, where the lowest bidders used to get the orders.
Outlook & Valuation: AMRJ has maintained a strong balance sheet, with the
return ratios in excess of 24% for the past few years. We expect revenues to grow
at a CAGR of 15.1% and net profit to grow at a CAGR of 22.2% for FY12-FY14E
period. The stock is currently trading at 11.9x its FY13E EPS and 10.2x FY14E EPS,
which in our view is attractive. We maintain our ‘Accumulate’ rating on the stock.
Our revised Target Price of Rs417 is based on 11.0x FY14E EPS (~26% discount to
15x FY14E earnings target multiple for Exide).

YES Bank :: Prabhudas Lilladher MID-CAP top pick

Beneficiary of a moderating rate cycle: Yes Bank is a wholesale fund bank
and margins have been under pressure due to high rates. With RBI
delivering a surprise ~50bps cut and wholesale rates cooling off, we
believe margins will inch up for Yes in FY13.
Asset quality continues to remain robust: Delinquency and credit costs
continue to remain low and Yes bank’s involvement in CDR cases seem
very low and hence, asset quality will continue to surprise positively. We,
thus, believe market expectations of 60-70bps credit costs in FY13 may not
materialize leading to positive earnings surprise.
SA momentum strong: Liability franchise has been a weak point for Yes
but the SA de-regulation was a shot in the arm. Liability franchise build-up
on expected lines with Rs5bn SA accretion QoQ in Q1FY13.
Valuations and stock view: Robust asset quality and improving liability
franchise will lead to further re-rating. We build in just 2% accretion to
CASA every year and ~60‐70bps of credit costs over FY13/14 which leaves
scope for further earnings surprise. The stock is trading at 2.1x FY13 book,
we believe valuations are very reasonable. We expect a PT of Rs450/share
over next 6-12mnts.

Voltas:: Prabhudas Lilladher MID-CAP top pick

Some green shoots in ordering environment: The quarter with flattish
growth on order book at Rs45.74bn. The domestic market contributed Rs
21.93bn (~up by 14% YoY) and Export market contributed ~Rs 23.81bn
(down by 10% YoY) to overall order book. The orders received in this
quarter stood at ~Rs7.69bn (up by 2.8x YoY). The company has started to
see some green shoots in markets like Saudi Arabia, Abu Dhabi and Muscat
and Qatar. In Abu Dhabi, the main contractor for the airport order has
been formalized and soon the sub-contractors would be appointed by
October. Also, there has been US$4.6 billion worth infusion into ALDAR,
the primary real estate developer in Abu Dhabi. Also few tenders are in
the process of being funded in Qatar for the upcoming FIFA 2022 and are
expected to be released from Q3 onwards. In domestic markets, the
growth continued due to increased focus on urban infrastructure and
industry like metals and automotives, and the expansion of scope of work
on existing projects, such as the Chennai Metro.
Gaining market share in UCP: Voltas saw 15% volume growth in Airconditioners
ahead of Industry which reported de-growth of 5%. Our
overall growth has been supported by a strong advertising campaign based
on well researched consumer insights, culminating in the “all-weather”
proposition. The extended summer and delayed onset of monsoon also
helped volumes. Voltas has emerged as the market leader in the Room AC
segment in May 2012 across multi-brand outlets with an 18.3% share
(independently reported by GfK Nielsen) which was further improved to
19.1% in June – widening the earlier lead of 60 bps over the nearest
competitor in May to 280 bps in June.
Outlook and Valuation: The stock is trading at 11.1x FY14E earnings. We
believe that the worst might be behind us, given the pain on Sidra project
already been accounted for and RIE’s likely to break even in FY13. The
outlook on orders look bright given the increased reach in terms of
geography in international markets and business segments in the domestic
market.. We believe that a lot of pessimism related to order flow is in the
price and hence, downside seems to be limited.

Gujarat State Petronet (GSPL) :Not harsh, but a poor tariff order :Nomura research

Tariff order not harsh, but would add to confusion
The Petroleum & Natural Gas Regulatory Board (PNGRB) has finally
issued the “provisional initial unit” tariff order for Gujarat State Petronet
(GSPL). On first look, compared to PNGRB’s earlier tariff orders for other
entities, the order appears soft. The determined tariff of INR23.99/mmbtu
(INR904/scm) seems good for GSPL, in our view, and better than street
expectations of INR750-850/scm. Even as the headline tariff indicates a
tariff reduction, and payout for retroactive implementation, we think the
actual payments may not be much, and GSPL’s average reported tariff
numbers may not decline much. But in the short term, there will be added
confusion till clarity emerges on retroactive payments, and actual impact
on GSPL’s realised tariffs going forward.

Buy Cairn India :: Prabhudas Lilladher

Exploratory upsides yet to be priced in: Cairn upgraded its estimate of
gross risked prospective resources to 530m boe from 250m boe in April
2012. However, as exploration period for the Rajasthan block expired in
2005, street has not accorded value to the exploratory upsides. As per
news reports, DGH will soon convene a Management Committee meeting
of the Block. We don`t see any reason why the extension in the
exploration period will not be granted, and thus, we expect the news flows
on exploratory upside to be positive, going ahead. It must be noted here
that under the clause b (4) of the exploration policy, if the exploration
period expires, there is a provision to carry out the work programme
further. Some examples where extensions have been granted are GSPC
Blocks, CB-ONN/2005/1 & CB/ON/2, Essar Block CB-ON/3 and HOEC Block
CB-ON/7. We ascribe a value of Rs88/share (to 530m boe at 40% discount
to ‘MBA’ implied EV/boe).
Strong business fundamentals: Strong production volumes growth (~50%
over next two years) backed up by a strong reserve base (1.7bn boe) along
with high FCF yields (~ 10% at current market price) makes Cairn India a
strong fundamental investment idea. We believe, increased capex to
increase production is likely to defer peak government profit share.
Moreover, targeted production increase to 300kbpd is likely to provide
further growth visibility over the current estimated peak output of
240kbpd, which might lead investors to value Cairn as a growing concern.
Likely announcement of the special dividend post the reorganization is
another near-term trigger for the investors.
Rupee hedge: With crude oil increasingly being treated as a financial asset,
there is a strong negative correlation between dollar index and crude oil
prices. At times of correction in crude, weakness in rupee is likely to
support earnings. We estimate crude oil prices to average at US$100/bbls
and US$105/bbls for FY13 and FY14, respectively, with OPEC playing the
balancing act in case of demand declines.

Motherson Sumi Systems :: Prabhudas Lilladher MID-CAP top pick

Diversified business model: With over 120 manufacturing locations spread
across 25 countries, Motherson Sumi Systems (MSSL) has established a strong
presence globally across various product lines of the automotive component
industry such as wiring harnesses, polymer processing, rear-view vision
systems and integrated modules. With the acquisition of Peguform, the
management is confident of reaching revenue of US$5bn in 2015 as against
US$2.9bn currently.
Revenue potential of €150m from SMR’s second plant at Hungary: SMR has
shown consistent improvement in performance and has recorded the highest
ever annual sales of €860m, registering a growth in sales of 14%. SMR has
started commercial production and supplies from its second plant in Hungary
to support German OEMs. The plant has an installed capacity of 6m mirrors
per annum and sale potential of €150m per annum. SMR is setting up new
facilities in Brazil, Thailand, China and Pune (India) for mirror manufacturing
and vertical integration, where production will commence in the coming year.
Samvardhana Motherson Peguform’s (SMP's) top-line last year was €1.67bn:
With annual sales of €1.67bn, SMP is now the largest subsidiary of MSSL on a
full-year basis. Peguform’s capex was at €32m for five months (Nov’11 to
Mar’12). Debt on the books of Peguform is at €392m i.e. Rs27bn including
€193m debt taken for acquisition by MSSL and Samvardhana Motherson
Finance as of March 31, 2012. We have built in revenues at €2.0bn and
EBITDA margin of 4.0% for Peguform in FY13E.
SMR’s and SMP’s new orders of €1.3bn each to improve visibility: MSSL has
won orders to the tune of €1.3bn (US$1.6bn) for Peguform; this is a very
positive development as Peguform’s quarterly run-rate is €470m. At SMR,
similar kind of order to the tune of €1.35bn has been won. Both the above
orders would be executed from FY15 onwards.
Valuations attractive; Maintain ‘Accumulate’: We expect better times ahead
for MSSL, with the execution of new order book at SMR and improvement in
margins at Peguform over the next one year. At the CMP, the stock is trading
at 12.6x FY13E and 10.9x FY14E earnings, which in our view, is attractive,
given the 35.0% CAGR in earnings for FY12-FY14E.

Torrent Pharmaceutical :: Prabhudas Lilladher MID-CAP top pick

Torrent pharma has a successful track record of consistently delivering
profitable growth: It is one of the better managed companies in the Indian
pharma space with high standard of corporate governance. Company’s
international formulation business is expected to lead the performance of
the company in the medium term.
It is a play on highly profitable and fast growing lifestyle segments in
domestic formulation business: Torrent derives its strength from being
leader in some of the lucrative and fastest growing chronic therapy
segments of CVS and CNS. It has consistently maintained its leadership in
these therapeutic segments with strong brands and new product launches.
It has one of the most profitable domestic formulation business among its
peers and even compared to larger counterparts. We believe that the
recent slowdown in domestic formulation business is transitory and the
management has taken corrective measures to address the slowdown.
Expect growth to come back on track from 2HFY13 onwards.
Torrent’s international business is on strong footing and expected to lead
the performance: The company’s investment in international business
have started paying off and we expect profit margins to expand as
operations scale-up. Healthy revenue growth expected in markets like US,
Europe and Brazil and entry into some of the largest branded generics
markets like Mexico, will drive revenue growth and increase profitability.
Next phase of growth will be led by regulated markets (ex-Germany).
Expect revenue from regulated markets (Ex-Germany) to grow at a CAGR
of 34% over FY12-14, led by US market.
Outlook and Valuation: We expect strong EPS CAGR of 24% over FY12-14
led by 24% CAGR in international business. The company has strong
balance sheet with lean working capital and zero net debt. Expect RoCE to
remain above 25% over next 2 years and free cash-flow generation of Rs6b
during the same period. The stock is trading at 14.1xFY13E and 11.9xFY14E
earnings which is at significant discount to large cap and some of the midcap
companies in the sector.

Buy Ranbaxy Laboratories :: Prabhudas Lilladher

India's largest pharmaceutical company with presence in 23 of the top 25
pharmaceutical markets of the world
Global footprint in 46 countries, world-class manufacturing facilities in 7
countries and serves customers in over 125 countries
Focus on Anti-infective, Urology, Respiratory, Anti- inflammatory and
Metabolic disorders segments (acute segment contributes >70% to overall
domestic business)
Became subsidiary of Daiichi Sankyo (DS), one of the largest
pharmaceuticals companies in Japan, in 2008 (acquired Ranbaxy stake for
US$ 4 bn, at price of Rs 735 per share)
Pursuing Hybrid business model
In talks with USFDA to resolve issues surrounding its Dewas and Paonta
Sahib facilities (created US$ 500 mn provision towards settlement with
DOJ)
Entered into Vaccines/Biotech space with Biovel acquisition in 2010 in
India. Focusing on Hybrid model by launching Daiichi pipeline products in
key strategic markets (including India, Romania, Spain, Mexico)
Recently received USFDA clearance for its Mohali facility

Power utilities: PLFs still under pressure ::JPMorgan

 All India thermal PLFs decline for a 6th month in a row to 61%. In August
thermal PLFs declined by a sharp ~550bps mom (~530bps yoy) to 61%. While
a pick-up in rains in Aug can partly explain the mom decline, the yoy decline
indicates: (1) insufficiency of fuel for the increased capacity and (2) continued
lack of demand for expensive power based on imported fuel. COAL Aug
offtake stood at 32.9MT up 8% yoy (while thermal capacity has increased by
17% yoy) but down 9% mom as rains picked up.

IPCA Lab :: Prabhudas Lilladher MID-CAP top pick

IPCA Labs is one of the better managed mid-cap pharma companies:
Consistent improvement in profitability along with strong growth in
business. Both of the key business segments of the company viz.
international formulation business and domestic formulation business are
likely to do well over next couple of years.
International business to grow on the back of strong revenue ramp-up: In
US post the recent USFDA approval for company’s Indore SEZ which
eliminates supply constraint faced by the company. Expect 31% revenue
CAGR in US over FY12-14. Further, institutional business is scaling up
rapidly with revenue expected to move up from Rs1.22b in FY11 to Rs4b in
FY14. IPCA is set to become one of the largest players globally in antimalaria
tender business and this is the most profitable business for the
company. Branded formulation exports are likely to grow at 25% CAGR led
by increasing geographic penetration and new product launches.
Domestic formulation business to outperform the industry: The company
has consistently outperformed the industry in the past, led by rising share
of chronic segments, product selection, increase in the field force and
brand building activity. The contribution from fast growing and lucrative
chronic therapeutic segments is on rise. It currently contributes 65% to
domestic formulation business. The performance in FY12 was impacted by
lower incidence of Malaria, high attrition in the field force and
restructuring of marketing divisions. However the management has taken
corrective measures and growth of this business should be robust going
forward.
Outlook and Valuations: We expect strong earnings CAGR of 35% over
FY12-14 led by robust topline growth of 17% over the same period.
Despite Rs5b capex planned over next 2 years, the company is likely to
sustain healthy return rations and low gearing. Expect RoCE to remain
above 25% for next 2 years with free cash-flow generation of Rs3.3b. The
stock is trading at 14.4xFY13E & 11.1xFY14E earnings which is at significant
discount to large cap and some of the mid-cap companies in the sector.

Petronet LNG :: Prabhudas Lilladher MID-CAP top pick

Concerns over potential regulation overblown: Currently, there is no
regulation for LNG terminals in India. However, our analysis of the various
regulations across geographies highlights the fact that some of the
concerns over the potential third-party access of new LNG terminals or
expanded capacity is exaggerated. International countries have
increasingly been more liberal towards regulation of the LNG terminals.
Dwindling domestic production unlikely to lower LNG intake capacity:
Likely take-or-pay agreement for all the incremental Dahej expansion
would reflect Dahej terminal’s first-mover advantage in a scenario of
tighter domestic gas supplies. This, coupled with opening of newer
demand centres on account of newer pipelines, likely reforms in key user
industries (led by fertilizer) and likely upward revision of the domestic gas
prices would put to rest concerns over utilization of the upcoming
incremental capacity at Dahej.
Outlook: PLNG’s utility nature of business (stable regasification margins
and term contracts), low regulatory risks and expanding volumes on
account of strong demand estimates, hold it in good stead. We believe
that the concerns over the regulatory intervention on the marketing
margin front as well as PNGRB regulating regasification charges are
exaggerated. We recommend ‘BUY’ on the stock with target of
Rs176/share.

buy ICICI Bank :: Prabhudas Lilladher

Core growth, key to bank’s ROE expansion, sees pick-up: Bank seems to
be coming out of the consolidation phase set in the aftermath of the global
economic crisis. The bank’s Q1FY13 loan growth and margin performances
has surprised us positively and inspires confidence of improving core
growth trends and sustenance of robust asset quality in FY13.
Lending business return ratios converging to industry levels: Low return
ratios has been the primary reason for relatively low valuations for ICICI’s
lending business. ROAs have inched up from ~1.0% in FY09 to ~1.5% in
FY12 and we expect margin expansion to drive ROAs to ~1.6%. Core
lending business’ ROEs is expected to improve from 11% in FY10 to
15.5‐16% in FY14 driving lower valuation discount to peers.
Asset quality performance comforting; CDR pipeline extremely limited:
Gross NPAs have inched up marginally but slippages levels seem
reasonable and credit costs at ~70bps is in line with management guidance
and lower than our expectations for FY13. Current restructuring pipeline is
also extremely low providing comfort.
Valuations: Current valuations are trading at 1.6x FY13 book. Improving
ROEs, pending growth in balance sheet could imply better multiples. We
have a Mar 13-target price of Rs 1,100 per share, implying FY13 P/B of
1.95x.

Buy HDFC :: Prabhudas Lilladher

Consistent growth with limited or no asset quality risks: HDFC has been
delivering 20% plus PAT growth consistently. Coupled with this, HDFC has
excellent track record in maintaining robust asset quality.
High ROEs to sustain; mortgage valuation extremely reasonable: Though
reported ROEs are at 21-22%, ROEs adjusted for subsidiary investments
and also interest on zero coupon bonds is +24-25% which we expect will
sustain. We envisage no regulatory or asset quality risks for the bank, plus
the large de-rating on the stock relating to technical factors (secondary
sale by strategic investors). We believe mortgage business valuations is
extremely reasonable at <3 .0x=".0x" 1-yr="1-yr" book.="book." fwd="fwd" p="p">IFRS accounting to address accounting concerns if any: ZCB issuance has
been in line with investments in subsidiaries (not consolidated) and we see
limited impact from reserve accounting for ZCB interests. Moreover, HDFC
is moving to IFRS accounting from Q2FY13 and that would address investor
concerns, if any. Consolidated ROEs remain at ~22-23% even after
factoring in ZCB interests.

Buy Infosys:: Prabhudas Lilladher

Weak Q1FY13 – Trouble bottoming out: Top client’s ramp-down which
troubled Infosys through H2FY11 are bottoming out. The consistent
underperformance from top clients is reaching a nadir. We expect ramp-down
to spill over in H1FY13. We are factoring 1% negative impact due to the same
in Q2FY13.
New pricing strategy to boost volume growth: Infosys reported one of the
sharpest declines in realization, since the Lehman crisis. The realization dip in
Q1FY13 was attributed to multiple reasons like cross-currency (0.7%), revenue
write-back (0.9%) and portfolio shift (~0.4%). On a like-to-like business
comparison, pricing for Infosys declined by ~1.7% QoQ compared to TCS’
1.06% QoQ. We expect weakness in pricing environment to persist because of
two reasons: 1) Aggressive marketing to grab the market share 2)
Commoditized businesses have no nuances to offer to clients. However, the
pricing cut may or may not always be accompanied by volume growth.
Attributing realization dip to one particular reason is tough as there are
multiple moving parts to its calculation. We expect volume growth to pick-up
in H2FY13 (despite being seasonally weak quarter) as the new strategy (for
both vendor consolidation and new projects) would drive the growth for the
company post Q2FY13.
Strong client addition – Not captured in performance: Infosys added highest
number of clients among the peers over the last four quarters. However, the
quarterly performance didn’t add-up to the same. We expect ramp-up of
projects from the client win to result in a positive surprise. We expect the
ramp-up to start driving the growth for the company.
Event Risk – Cannot be ruled out: The month of August will witness the trial
of Jay Palmer case. Any verdict against Infosys could result in further
downside risk to the stock price. However, the language of the verdict remains
the key as it will clarify the doubt over deliberation.
Trough valuation to restrict further de‐rating: Infosys is currently trading at
13.1x FY14E earnings estimate, a trough valuation at which it traded post
Lehman crisis. Retain ‘BUY’ due to valuation comfort, with a target price of
Rs2,850.

Buy Coal India :: Prabhudas Lilladher

Price pooling and revised penalty to come only if it is not earnings
dilutive: The last Board meeting on July 31, 2012 turned inconclusive
owing to apprehensions of the board associated with price pooling and
revised penalty. This clearly vindicates the candid investor-friendly policy
of the Board. We believe that price pooling should be mechanized in a
manner that it does not raise risks for pricing of its coal. However, we were
surprised on the revision of penalty since it was nowhere considered in
PMO’s latest directive. Nevertheless, we are confident that Coal India
would be able to meet its trigger levels of 65%, underscoring the risk of
penalty.
Concerns overdone on FSA deadlock and cut in e-auction volumes:
Management guided that increased supplies to power sector would lessen
its e-auction quantity from the existing 10% to 7% of the total quantity by
the end of FY17. However, we do not see any concerns on E-auction
volumes in the next 2-3 years, given the logistic bottlenecks and FSA
deadlock. Incremental risks to earnings associated with Presidential
directive were alleviated by the Board in the form of putting insignificant
penalties in new model FSAs.
Valuations in attractive territory: Thanks to 6% volume growth and
nominal 3% increase in flat realisations, we expect CIL’s earnings to grow
at a CAGR of 15% during FY12-14, despite sharp increase in the wage cost.
We value the stock at Rs390, P/E of 12.5x FY13E operational EPS of Rs23.1
and cash per share of Rs102. We believe that valuations are justified, given
the sustainable RoEs in excess of 30%.
Risks: Key risks to our recommendation remains. 1) Lower-than-expected
growth in sales volumes and 2) approval of MMDRA act.

India Strategy & Top Ideas- Investment Argument, Financials & Valuation discussion:: Prabhudas Lilladher

Sharp slowdown in job growth in Aug12. Non-farm payrolls grew by
96000 sharply lower than consensus estimates of 125000 and
141000 jobs added in July12 (The average for 1QCY12 and 2 QCY12
is 226000 and 76000 respectively)
• Unemployment rate falls to 8.1% against expected 8.3% and down
from 8.3% in July12. Unemployment above 8% for 43rd consecutive
month, holding an ominous portend for President Obama’s reelection
prospects in November
• Broader gauge of jobless rate measured by percentage of Americans
who are either unemployed or are working part-time as they could
not find full-time employment or have given up hope and not
looking for jobs has fallen to 14.7% in Aug12 from 15% in July12
• The participation rate i.e. the labor force as a percentage of the
population as a whole has fallen to 63.5%- the lowest since Sept81
• Uncertainly related to Euro debt crisis, US fiscal policy & fiscal cliff,
November polls holding back executives from fresh hiring
• University of Michigan’s (UM) Aug12 Consumer sentiment gauge at
3-month high at 74.3. Consumption was bolstered by price
discounts, low interest rates & success in trimming debt
• UM’s gauge of Consumer Expectations in Aug12 fell to 65.1 from
65.5 last month- its lowest level since Dec 01 due to belief that
financial situation today is worse than five-years ago and no wage
gain expected over next year
• In Aug12, Conference Board’s Consumer Confidence Index hits its
lowest level since Nov 11 partly due to higher petrol prices
• Retail sales are estimated to grow at 0.9% in Aug12 following a 0.8%
advance in July12. However rising food & fuel prices and stubbornly
high unemployment rate is expected to act as a dampener for
continuing the buoyancy in 2HCY12
• ISM index of non-manufacturing activity (i.e. services firms which
contribute 70% of US GDP) grew to 53.7 in Aug12 vis-à-vis 52.6 in
July12 due to a jump in hiring. It is 32 straight month of growth for
services sector
• Strength in services offset by weakness in manufacturing. ISM index
of manufacturing activity shrank in Aug12 to 49.6 from 49.8 in
July12- the lowest reading in three years due to a fall in new orders,
production and employment
• Construction spending dropped by 0.9% in July12 (the first decline
since March12) verses an estimated growth of 0.4% and a growth of
0.4% in June12 due to both public and private sector cutting back on
investments
• All eyes on the US FOMC meeting on 12th and 13th Sept12 where
the Fed is expected to announce third round of unsterilized asset
purchases (QE3) and possibly indicate that federal funds rate would
continue to remain at near-zero levels beyond late 2014
• U.S. GDP is expected to grow at 2% in 3QCY12 following 1.7% growth
in 2QCY12, 2% in 1QCY12 and 4.1% in 4QCY11

Alok Industries Ltd:: CRISIL IER -IndependentEquityResearch

Alok Industries Ltd
Pulled down by retail and real estate


Alok Industries Ltd’s (Alok’s) fundamental grade has been revised to 2/5 from 3/5 by CRISIL
Research. The company’s balance sheet has deteriorated more than our expectations. Its
consolidated debt-to-equity has increased to 6.1x in FY12 after adjusting for goodwill. Losses
in the UK retail store, higher than expected working capital levels despite rising share of
polyester business and no further deals in its real estate business have worsened its financial
profile. However, the core textile business continues to do well given Alok’s strong
capabilities and the huge capacity in this business. We expect the core business to help Alok
to improve its financial profile in times of tight liquidity

VST Tillers Our stand validated by Agricoop FY12 annual report; Buy ::Anand Rathi

In its FY12 annual report, the Dept. of Agriculture & Cooperation
Ministry (Agricoop) corroborated the positive trends we envisaged for
VST Tillers (VSTT). We predicted better industry volumes and farm
segmentation in our report, India Autos-Valuations no longer
compelling , dated 8 April 2012. We maintain a Buy.

Govt hikes diesel price by INR 5; caps LPG cylinders at 6/year: Elara

On a day of taking tough decisions, the
Government took the most difficult of all:
Raise diesel prices by Rs 5 a litre
(excluding VAT). The late-evening move
also capped the number of subsidised
LPG cylinder a household can get at six
per year. Earlier in the day, the
Government de-allocated four coal
blocks. Diesel will now cost
approximately INR 47 a litre in Delhi. The
price revision comes after more than a
year. However, PDS kerosene was left
untouched. While not tampering with
the retail price of petrol, the Government
decided to reduce the excise duty on the
fuel by INR 5.30 a litre from INR 14.35
(plus education cess of 3 per cent making
it 14.78 per cent). But this benefit is not
being passed on to the consumer. An
official statement said the Cabinet
Committee on Political Affairs’s (CCPA)
decision would be implemented with
effect from midnight of September 13/14.
The revised diesel price in Delhi will be
approximately INR 47 a litre.

Airlines 1H12 leaders & laggards; forward bookings encouraging but 2H12 market estimates still look too optimistic ::JPMorgan

 Headline net profits were generally above/in line with our forecasts but
below consensus. 50% of the airlines beat our 1H12 forecasts, 31% in line and
19% below. 31% of airlines beat market forecasts, 19% in line and 50% below.
 Top line still growing. Revenue grew 10% y/y on average but was flat h/h for
the sector. SpiceJet (+52% y/y), Jet (+28%) and Virgin (+21%) were the leaders
while MAS (-4%), Tiger (flat) and China Airlines (+2%) were the laggards.
 Pax load factors quite steady but yields improved. Pax traffic (RPK) rose 8%
y/y on average, ahead of the sector’s 7% capacity (ASK) growth, resulting in a
0.4ppt improvement in PLF to 78.0%. Pax yields improved, partially passing on
the higher fuel costs. Yield rose 5% y/y on average but fell 1% h/h.

Lupin’s surprising rise in Quetiapine:: Elara

We notice Lupin’s surprising rise in prescription (Rx) share in August
2012 in Quetiapine (Seroquel) after staying moderate at 8-10% market
share. The drug went off-patent in March 2012 and Lupin received
approval on day-one of generic competition along with other para-IV
challengers. We believe that Lupin’s growth to 35,208 Rx in August
2012 from average 8,063 Rx in April-July 2012 need an insight in the
cause, while other competitors remains at similar number of Rx in
August 2012. Though management explains the rise is normal
business progression, we believe the reason could be aggressive price
cut/special incentive to attract distributors’ in Seroquel. The growth
could also be a result of falling supply in market from leading
competitors. At innovator price, the Alzheimer drug’s market value
was USD4.5bn in US before being generic.

Sesa Goa :Iron ore mining suspended in Goa:Nomura research

Goa government suspends iron ore mining in the state …
The state government of Goa has suspended iron ore mining in Goa, as
recommended by the Justice Shah committee constituted earlier to
probe the allegations of mining irregularities. Please note that the
government has allowed movements of iron ore already produced and
stored at ports or in transit.

Adani Power:‘What-ifs’ linger; downgrade to Reduce ::Nomura research

Operating risk persists as key
earnings drivers hang in the
balance; financing risk rises

LKP BYTES : Indag Rubber (Buy@Rs.230, Target Rs.360)

The story so far ………..

Tyre Retreader – Indag Rubber grew its earnings at a scorching 100% last fiscal and crossed the Rs1bn market capitalization. We like its virtually debt-free asset light business model which has the ability to generate free cash flows and superior ROCE of almost 50%. The company has a wide distribution network of ~500 retreaders and dealers across the country and now commands a 15% market share in India.

Multi Commodity Exchange of India (MCX) Monopolistic. Cutting-edge. Xciting!:: Motilal Oswal

Monopolistic. Cutting-edge. Xciting!
Dominant share; future ready; high growth potential
 Multi Commodity Exchange of India (MCX) is a state-of-the-art electronic commodities
futures exchange, with near monopolistic market share (86% in FY12).
 Our expectation of sustained market leadership stems from its technological edge
and future readiness.
 MCX's volumes have grown at a CAGR of 47% over FY07-12. Future potential remains
exciting given: [1] likelihood of new products and participants with the FCRA Bill, [2]
with 2m client accounts as compared with 19-20m demat accounts, the industry has
only scratched the surface with respect to potential volumes.
 We believe value from MCX-SX (Stock exchange promoted by MCX and FTECH in
2008) is more definite than merely option value. Policy to maintain ~50% payout ratio
is a key valuation positive. Our target price of INR1,440 implies 23% upside. We
initiate coverage with a Buy rating.

Jain Irrigation Systems (JI IN) Annual Report Analysis: Concerns Remain Despite Some Improvements :: Jefferies

Key Takeaway
Jain's FY12 Annual Report shows some improvement in inventory and
receivables against FY11 but not enough given growth slowdown. Subsidiaries
disappointed again and forex losses have removed Rs5/share of net worth.
Management needs to deliver on promise of reducing capex. Recent fund
raising is incremental positive but does not solve the core business model issue.
As Jain looks for a "new normal" there is significant uncertainty ahead.

Maruti Suzuki - Await a better entry point: Religare research

Await a better entry point
We initiate coverage on MSIL with a HOLD rating and TP of Rs 1,350 (13.5x one-year forward earnings). We believe FY13 could be a tough year for the company due to the weak demand environment coupled with production losses following an extended shutdown at its Manesar plant. Further, with 25-28% of sales exposed to the Yen, concerns over currency volatility remain. While FY14 could see a demand recovery off a low base, we are cautious on the stock near term and await a better entry point.

SELL Zee Entertainment: TP: INR 165.00 :: Religare research

Too much optimism all around; downgrade to SELL
We downgrade Zee Entertainment (Zee) from Hold to SELL. Even though Zee will benefit from compulsory digitisation and hence higher subscription revenue, we are negative on the stock given (a) the muted outlook on advertising revenue due to poor macro conditions and limited pricing power, (b) rising content costs which more than offset gains from better ad ratings, (c) growing regional competition and (d) continued underperformance in the sports business. We expect EBITDA margin compression in coming quarters

LIC Housing Finance - Finely poised; visit note; upgrade to Buy ::Edelweiss pdf LINK

LIC Housing Finance (LICHF IN, INR 258, upgrade to Buy)

We are upgrading LIC Housing Finance (LICHF) to ‘BUY’ (TP: INR 315, 2.25x FY13E book) as it scores high on two counts: i) benign asset quality; ii) upward NIM trajectory benefiting from easing wholesale cost. While perception is that prepayment penalty waiver will pose threat to LICHF’s NIMs and growth amidst intensifying competition (from banks), our interactions with DSAs indicate rate differential is not significant enough to entice customers to switch from LICHF. Moreover, it has a relatively stable customer profile (90% salaried class, 50%+ from PSUs). We believe there is scope for re-rating from 1.8x FY13E book for 17-19% RoE given limited vulnerability of RoA/RoE.

Gift from relative is exempt from tax ::Business Line

My organisation is a cooperative institution and I have taken a house on rent. I am getting house rent allowance (HRA) by my employer. Kindly advise on the exemption available towards HRA.

— K. Prabhakaran

Take plot-cum-construction loan to save on taxes ::Business Line

I am 27 years old and my wife is 26. We are planning for a child by 2014. 

My monthly income is Rs 60,000 and my wife earns Rs 30,000. I live in office given quarters. My current monthly expenses are Rs 18,000.

My monthly PF and VPF contributions amount to Rs 10,000. The current accumulation is Rs 6 lakh. My wife’s contribution is Rs 3,000.

Savings:

 I have invested Rs 3 lakh in Gold ETF and I have Rs 5 lakh in a savings bank account. I intend to buy a plot for Rs 20 lakh with a loan of Rs 12 lakh.

Since I plan to construct a house there, is it better to take a personal loan for land and take home loan for construction?

For construction I need Rs 25 lakh, of which Rs 13 lakh I wish to draw from EPF. Once I get transferred to Chennai I will live in this house. I have no other investments.

Can I take a loan against my land in Tirupati for purchasing the plot? I wish to close the home loan within five years.

Is it advisable to pre-close the loan, or is there any better strategy to buy the plot?

I also wish to know whether I will get tax benefits for the land loan availed if I construct the house.

My father retired from defence service with a pension of Rs 12,000. Both parents are covered by health schemes for Rs 3 lakh. Is it better to take separate cover for them? My immediate family is covered by my employer.

— Sonu Dandala

Savings, driver of growth ::Business Line

Register for KYC services ::Business Line

Here are some frequently asked questions (FAQs) on ‘know your client’ registration agency (KRA).

What is KYC and what are the latest regulatory guidelines in this regard?

KYC is an acronym for “know your client”, a term commonly used for the client identification process. SEBI has prescribed certain requirements relating to KYC norms for financial institutions and financial intermediaries, including mutual funds, to ‘know’ their clients. This would be in the form of verification of identity and address, obtaining information of financial status, occupation and such other demographic information.

With effect from January 2012, SEBI has set out revised KYC norms to make the process uniform across the securities market and introduced a common KYC application form for all SEBI registered intermediaries, namely, mutual funds, portfolio managers, depository participants, stock brokers, etc.

Investors must, therefore, now use the uniform application form to apply for KYC at the time of investment in mutual funds.

In the revised KYC regulations, in-person verification has been made mandatory for mutual fund investors as well.