The J.P. Morgan View Fade the growth trade and instead focus on value:: JPMorgan

 Asset allocation –– We are not taking part in the growth trade of the past
two weeks (rally in Cyclicals and commodities plus sell off in bonds) as we
see little reason to upgrade growth forecasts. Our strategy is instead a valuebased
capturing of high risk premia in equities and HY in a world of low
market and economic volatility.
 Economics –– Better US jobs data and German IP and orders reduce
downside risk biases on Q2, but are not enough to create upside risks.
Forecasts are unchanged.
 Fixed Income –– Selloff can only go a little further with monetary policy so
supportive.
 Equities –– We fade the Cyclical rally. We have not yet seen concrete
indications of a rebound in global manufacturing.
 Credit –– We stay up-in yield globally, duration hedged, with a preference
for the dollar markets.
 Currencies –– We keep a short JPY basket vs USD and the commodity
currencies and go short CAD vs USD as it appears expensive to us.
 Commodities –– We stay bullish natural gas prices on its increasing use for
power and transportation, and the rising possibility of US gas exports.

Rcom: Mixed quarter with in-line revenues and lower-thanexpected margins; watch for further deals with RIL :JPMorgan

Reliance Communications (RCom) reported a mixed quarter (4QFY13) with
in-line revenues, while EBITDA margins decreased modestly Q/Q (vs. our
expectation of increase). Wireless revenues grew 2.5% Q/Q, while GEBU
(Global & Enterprise) revenue growth at 0.5% Q/Q was below our estimates.
EBITDA margins contracted 30 bps Q/Q. Operating metrics remained mixed.
 Revenue growth was in-line with expectation. Revenues of INR 54.1 billion
(excluding one-off i.e. INR 5.5 billion reversal of provision for business
restructuring) came in-line with our and consensus expectations. Wireless
revenue growth of 2.5% Q/Q was as per our estimate, but GEBU revenues fell
1.5% short of our expectation. RCom registered Y/Y revenue growth of 1.8%
Q/Q in 4QFY13 compared to 12.9% for Idea & 8.4% for Bharti (India & SA).
 EBITDA margins decreased 30 bps Q/Q (excluding reversal of provision
for business restructuring) despite sharp decline in Employee costs (versus
our expectation of modest margin expansion). We expected expansion in
margins due to lower SG&A & expected improvement in ARPMs. Surprisingly,
Employee costs decreased 33% Q/Q marking the lowest absolute quarterly
employee costs since FY06. Wireless and GEBU EBITDA margins remained
broadly flat Q/Q at 26.7% and 23.1%, respectively, below our estimates.
 Mixed operational metrics. Volume/total minutes growth of 2.3% Q/Q was
primarily driven by increase in MoUs. ARPMs remained broadly flat Q/Q
despite increase in tariffs in Sep-12 quarter. Notably, Tariff hikes impact
ARPMs for 2-3 quarters after the hike because of incremental shift of existing
customers to higher tariffs. RCom has again announced to increase tariffs by
about 20-30% in May-13. We need to see increase in ARPMs in the coming
quarters to see the effectiveness of these tariff increases.
 The highlight of the quarter was RCom’s agreement with Reliance Jio
(RIL) to share its inter-city optic fiber network. RCom suggested that this is
the first step in a series of a ‘comprehensive framework of business cooperation’ between the two companies. Notably, further large deals with
Reliance Jio are a key risk to our UW rating on RCom’s stock. See our note,
"Signs optic fiber network sharing deal with Reliance Industries; needs much
more to relieve balance sheet stress” dated April 2nd, 2013.
 Investment view. We have UW rating on RCom’s stock as it continues to lose
subscriber & revenue market share and leverage remains uncomfortably high.
However, further sizable asset sharing deals with RIL and asset monetization
remain key risks to our UW rating.

Capex Improves, Consumption Remains Weak :: Morgan Stanley

IP growth bottoming out: Industrial production (IP)
growth accelerated to 2.5% YoY in March vs. 0.5% in
February 2013 (revised downwards from 0.6%
earlier). This was in line with consensus expectations
as per a Bloomberg survey of growth of 2.4% YoY.
On an annual basis IP growth decelerated to 1% in
F2013 vs. 2.9% in F2012.
Capex improves, consumption remains weak: On
a 3MMA basis, IP growth accelerated to 1.8% YoY
during the three months ended Mar-13 compared to
0.8% in the three months ended Feb-13. On a
seasonally adjusted basis the IP index has increased
by 4.3% (on a non-annualized basis) from the trough
in Sep-12. Moreover, components of IP are showing
improvement in growth mix, with capital goods output
growth in a positive zone for the second consecutive
month. While consumer goods output has remained
weak, we believe this is a necessary adjustment to
improve the underlying growth mix and productivity
dynamic. Indeed real government spending less
interest and subsidy (adjusted for CPI), which is
essentially transfers to households, has declined by
6.5% YoY between Sep-Feb 2013. While in
sequential terms real government spending may
show some improvement from these low levels, we
expect it to remain weak in 1H F2014 and
consequently consumption spending growth will
remain slow.
Manufacturing sector is recovering but mining is
still a drag: In the manufacturing segment, output
growth accelerated to 3.2% compared to 1.9%YoY in
Feb. However, the details of manufacturing sub
segment growth raise some concern about the quality
of data. While the segment ‘wearing apparel’ with a
(weight of 2.8%) rose by 152% YoY and contributed
4.2% to IP growth, industry sub segment ‘publishing
printing and media’ (weight of 1.1%) declined by

India HPC/Foods Mar'13 qtr: Revenue/earnings growth rates held up well despite weak macro

 Domestic revenue growth rates have held up well. Barring a few
discretionary segments, most of the companies that have reported so far
fared better/in-line with expectations on the revenue growth front during
the Mar’13 qtr. Volume growth trends for most companies were in-line
or better than estimates. Key drivers for growth were: 1) sustained brand
investment coupled with increased promotions in a few categories, 2)
consistent investment behind product innovation, and 3) aggressive
distribution push in rural markets. While Dabur, GSK Consumer and
Emami posted healthy volume growth of 12% (domestic), 8% and 13%,
respectively, Nestle India and Marico posted subdued growth. HUL’s
5.5% volume growth was marginally better than expectations. CSD
channel sales witnessed recovery for most companies. Modern retail
sales growth was good for most except HUL. Rural sales continued to
grow ahead of urban regions.
 Overseas operations underperformed for most companies. While
weak sales and margin performance for the Africa region weighed on
GCPL’s earnings growth, Dabur continued to register sluggish growth
rates for their Namaste operations. Marico reported subdued growth for
its MENA operations. Emami’s exports suffered due to discontinuation
of low margin products and inventory correction (at the distributor level)
for their overseas (CIS) operations.
 Gross margin expansion surprised on the upside … Benign raw
material inflation (steep decline for palm oil and largely stable crude oil
prices) supported healthy gross margin expansion across most
companies. Margins for food companies (Nestle India and GSK
Consumer) further benefited from higher realisations. We expect GM
expansion to continue in the near term supported by a moderate RM
inflation outlook.
 … however higher A&P spend/other expenses offset much of these
gains. Much of the gross margin gains were utilised for higher brand
investments, thereby limiting EBITDA margin expansion. Dabur was the
exception as A&P/Sales declined -80bps y/y coming off the high base.
Higher staff and/or other expenses negated some of the GM gains for
Dabur, GCPL, Marico and GSK Consumer.
 Further re-rating unlikely; focus on volume growth and earnings
momentum. The Indian staples sector trades at the higher end of its
valuation range (31x P/E, 25/35% premium to its past 3/5 yr-average).
The sector has outperformed the broader market by 14% YTD given high
quality earnings delivery and a flight to quality. We believe further
re-rating is unlikely from current levels and we prefer companies with
higher earnings surprise prospects, pricing power and/or limited
competitive risks. Our preferred picks are ITC (OW), Dabur (OW),
UNSP (OW) and GCPL (OW).

The Search for Quality: India’s Best-in-Class ::Morgan Stanley Research

High performance with consistency: Most of us know
quality when we see it. There is a certain finesse in
performance, consistency and reliability about quality.
These characteristics of high quality are common to
products as they are to companies. The challenge is to
objectify such subjective assessment, especially in the
context of companies. The common principle is that high
ROE, high free cash flow, low beta and low financial
gearing represent quality. We argue that apart from high
performance (say high ROE or growth), the volatility (i.e.,
consistency) of metrics such as ROE and growth is also
critical in measuring quality.
Quantifying quality: We try to short-list India’s best-
quality companies of the past decade from among the
top 200 by market cap with a minimum listing history of
three years. We rank companies in descending order of
ROE, EPS, sales and dividend growth, and net margins;
and in ascending order of the coefficient of variation of
these metrics. We also rank stocks in ascending order of
trailing 10-year returns and in descending order of beta,
debt-equity, and trading volumes.
Our argument: high quality has high performance in the
form of high ROE, net margins, sales, EPS and dividend
growth. Simultaneously, the variability of these
fundamental factors needs to be low. High quality is also
about high returns albeit with low beta, stable investor
bases (thus low share turnover) and low financial risk. We
assigned company scores based on their ranks for each
of these 14 metrics (see Exhibits 1-2 for the results).
If I could wave my magic wand: Ideally, we need to
know the companies that will be on such a list 10 years
hence. Unfortunately, it is beyond our ability to forecast
which companies will deliver the best performance with
the highest consistency in the coming decade. Still, even
though one of the most common disclaimers in our
industry is that historical performance is not a guide to
future performance, the achievers of the past decade
could continue to deliver results in the coming 10 years.

Cognizant reports strong revenue growth in 1QFY13; we maintain our "CY13 better than CY12" thesis :JPMorgan

Cognizant (CTSH, US$64.88, rated OW by our US analyst Tien-tsin Huang)
reported a strong revenue quarter with Q/Q revenue growth of 3.7% in 1QCY13
(including revenues from C1 acquisition). The company maintained its CY13
revenue growth guidance of “at least 17%” Y/Y implying “at least 15.8%”
organic Y/Y revenue growth after excluding US$90 mn for C1 acquisition
revenues. The company guided for 2QCY13 revenues of USD 2.13 billion
implying 5.4% Q/Q revenue growth. The company needs to deliver 3.0% Q/Q
revenue growth in the next two quarters (3Q and 4QCY13) to achieve its annual
revenue growth guidance, which seems achievable. We note that gross margins
declined to 40.6% this quarter, the lowest level since CY2000.
 Cognizant reported 1QCY13 revenues of US$2.02 billion (including C1
revenues) meaningfully ahead of guidance of ‘at least US$ 2.00 billion’ and
JPM expectations. The 3.7% Q/Q growth along with 2QFY13 revenue growth
guidance of 5.4% is encouraging in our view. Importantly, 2QFY13 is likely to
benefit from full quarter of C1 revenues as well, but excluding that also, we
believe organic revenue growth guidance of 4%+ Q/Q is healthy. The company
needs to achieve 3.0% Q/Q revenue growth in 3Q and 4QCY13.
 Cognizant maintained its CY13 revenue growth guidance at 17% (~16% on
organic basis). After Cognizant’s experience last year (CY12) when the
company had to bring down its revenue growth guidance from 23% to 20% after
one quarter into the year, we expected Cognizant to be stay extra conservative in
its guidance – likely a case of once-bitten, twice-shy. We believe the company
would naturally want to get back to the “beat-and-raise” earnings pattern,
which has been the hallmark of its performance versus guidance history except
in 2012. Hence, we expect Cognizant to beat its revenue guidance in CY13.
 However, gross margins decreased to 40.6% in 1QCY13, the lowest level in
the last 13 years. Gross margins declined 190 bps Y/Y and 30 bps Q/Q.
Continuous decline in gross margins impacts a company’s ability to invest in
sales and marketing efforts, which impacts revenue growth in medium-to-long
term. Cognizant has an investment-intensive model (high SG&A) that helps its
growth premium and it needs healthy gross margins to sustain this. Management
suggested that pricing remained broadly flat during the quarter.
 Other Details: Financial Services revenues grew 4.9% Q/Q, while
Manufacturing/Retail/Logistics revenues grew 4.2% Q/Q. Healthcare revenue
growth was relatively tepid at 2.0% Q/Q. Rest of Europe (non-UK) delivered
solid growth of 9.7% (thanks to the C1 acquisition), while revenue growth from
UK was also solid at 5.0% Q/Q. Europe (in total) grew 6.7% Q/Q (organic
growth of about 4% Q/Q) meaningfully ahead of company average. North
America reports revenue growth of 3.0% Q/Q.
 Investment view. We continue to think that CY13 will be a reasonably better
growth year for IT Services than CY12. We have OW ratings on Infosys &
HCLT. TCS’s (N) valuations look a tad punchy in the near term, but we see
TCS as a core holding for portfolios as gains from consistent leadership
compound over the long term. The math of compounding tends to be underappreciated – the longer the timeframe, the greater the compounding gains. That
said, the evolution of the immigration bill needs watching (as it relates to visas)

Angel Broking Weekly Review

Forwarding you the Weekly Review dated 01.06.2013. Kindly click on the following link to view the Report.

  

Weekly Review

 

Angel Broking - 4QFY2013 GDP Growth

 

Forwarding you the GDP Data Analysis for 4QFY2013.

 

Real GDP growth at 4.8%, in line with expectations

 

Real GDP growth for 4QFY2013 came in at 4.8%, in line with our as well as market expectations, as against 4.7% in the previous quarter and 5.1% in 4QFY2012.

 

Growth in the services sector has decelerated to 6.6% the lowest in about 4 years resulting in a sub-5% reading for GDP growth for the second consecutive quarter. 

 

While 3QFY2013 GDP growth has been revised upwards to 4.7% from 4.5% estimated earlier, GDP growth in the three preceding quarters has been revised slightly downwards.

 

Overall for FY2013 as a whole, real GDP growth stands at a decadal-low of 5% as compared to 6.2% during FY2012.

 

Ob the demand-side, GDP at market prices has slumped to 3.2% as growth in consumption, investment as well as exports has more than halved as compared to FY2012.

 

We believe growth has bottomed out in 3QFY2013 and we expect a gradual pick up with recovery in consumption as well as investment to about 5.8% in FY2014.

 

Kindly click on the following link to view the Report.

 

4QFY2013 GDP Growth

 

BAJAJ ELECTRICALS E&P cost over runs wound profitability, yet again": Edelweiss,

Bajaj Electricals’ (BJE) Q4FY13 numbers were disappointing as lower
margins across businesses took a toll on overall profitability. While cost
over runs continued to plague engineering & projects (E&P), consumer
durables’ margin dipped due to inventory write-down of nonmoving/
defective items. Revenue grew 5% driven by consumer durables
(up 22%) and lighting (up 15%) even as E&P declined 22%. The company
estimates 25% (INR42bn) revenue growth and 100bps margin
improvement in consumer-facing business in FY14. We cut our FY14E and
FY15E earnings 9% and 8%, respectively, as we lower our E&P margin
estimate. We believe near-term pain is unlikely to subside in E&P as BJE
continues to execute low-margin sites. Hence, maintain ‘HOLD’ with
revised target price of INR185 (earlier INR200).

PSU banks no longer proxy to bond yields:: Credit Suisse

■ PSU banks historically treated as proxy to bond yields: Over the past
two months, Indian benchmark bond yields have fallen over 50 bp on the
back of easing inflation, RBI rate cuts and increased limits for participation
by foreign investors in the bond market. Indian banks, particularly the stateowned banks, have historically been traded/treated as bond proxies owing to
their large long-duration bond holdings (partly on account of SLR
requirements) and historically high earnings sensitivity to bond yields.
■ Current cycle different owing to large pension liabilities: These banks,
in the previous credit cycle, had used large gains on the bond books for
balance sheet clean-ups. There are expectations that history may repeat
itself. However, over the past decade: a) size of bond portfolio has dropped
from 80% of loans to 40% of loans; b) investment portfolio yields are similar
or lower than current bond yields in contrast to the 500 bp gap in the
previous cycle; c) pension liabilities are up 3-4x, and with discount rate here
pegged to the bond yield, a drop in yields increases the liability.
■ Earnings are no longer positively correlated with bonds: Therefore, in
contrast to popular perceptions, we estimate that earnings of most Indian
government banks, including SBI, are now inversely correlated to bond
prices. We hence continue to prefer private banks to the state-owned banks,
despite the continued widening of the valuation gap, and a recovery in the
state-owned banks will have to be led by a turn in the asset quality cycle
rather than just a rally in the bond market. HDFC, HDFC Bank and Axis
Bank are our preferred picks in the sector

India Equity Strategy Color of Money: Tracking Institutional Ownership...:: JPMorgan

Quarterly changes in Institutional ownership. Latest data released for
the March quarter indicates that FIIs increased their ownership of Indian
equities by a significant 120 bps, while DIIs reduced their holdings by a
marginal 10 bps. Current FII ownership at 18.6% is at an all time
high. Insurance holdings of Indian equities at 5.6% have been reducing
over the last four quarters. Mutual fund holdings at 3.5% are well off the
highs though. Sectoral trends were mixed across the investor categories.
 Portfolio positioning. Currently FIIs are overweight on Financials,
Consumer Discretionary and Telecom. They are underweight IT Services,
Energy and Industrials. DIIs are currently overweight Consumer staples
and Energy. DIIs are underweight Financials, Consumer Discretionary
and Health Care sectors.
 J.P. Morgan portfolio stance – Our portfolio stance is biased toward
high-quality Financials, Energy, IT services, Health Care and state
owned utilities.
 Indian equities - hot but vulnerable. India has been the preferred
destination for FII inflows over the recent past (YTD, US$11.5 bn in
equity flows). FII ownership of Indian equities is at an all time high.
Latest available EPFR data indicates that FII's overweight position on
India is at a six year high. From a technical perspective 1) this position
highlights the vulnerability of India to a global risk off trade. The
vulnerability extends to the currency as well - the large CAD is being
funded mainly by capital flows and 2) underscores the need for the
Government to ensure growth revival.
 RBI cuts Repo Rate by 25 bps, but strikes a cautious guidance. Our
Economists believe that we are nearing the end of the mini easing cycle
and expect only one more cut of 25 bps in July. Liquidity remains tight,
making lending rates sticky. We maintain that there are transmission
challenges in reducing lending rates over the near term.

India capex: The revival begins: Credit Suisse,

Mythbusting
Recovery underway and set to continue: Contrary to conventional wisdom
we note evidence that an investment recovery is underway, while the
fundamentals suggest the pick-up will be both reasonably robust and
sustainable. We are looking for real gross fixed capital formation to expand by
around 8% in 2013/14 and 12% in 2014/15. Both projections are significantly
above the consensus. It seems to us that the market’s bearish view of Indian
capex is conditioned by a number of factors, most of which appear to be myths.
 Myth 1 – There is no recovery in investment: The national accounts data
actually showed capital spending rising 6% in the year to the December
quarter, while growth in the production of capital goods bottomed in mid-2012.
 Myth 2 – Investment won’t pick up before capacity utilisation rises:
While this appears logical, the data suggest capex growth actually leads
CapU. This is also true of other countries.
 Myth 3 – Bank lending growth lead capital investment: This is another
popular argument but, again, the causality runs the other way round probably
because companies initially finance higher capex from retained earnings.
 Myth 4 – Interest rates have little impact on investment spending: Our
statistical analysis clearly suggests that interest rates have a significant role to
play in driving capex.
 Myth 5 – Upcoming elections will lead firms to postpone investment:
History again suggests this is unlikely to be the case.
Reasons to be positive: In modelling real investment growth, we find various
interest rate variables, the oil price, export growth and the equity market
(designed to pick up profit expectations) to be the key macro drivers, all of
which are becoming more supportive. Meanwhile, the government’s Cabinet
Committee on Investment may succeed in unlocking some stalled projects. The
obvious riposte is that companies are not telling us that a recovery is underway,
but there are a number of factors that could explain this.

Persistent System: Buy Target : Rs. 603 :FinQuest

ersistent Systems Ltd. (PSL) came up with a decent set of numbers for Q4FY13. Revenue
growth was driven by the traditional IT services business while IP revenue was slightly subdued.
The sequential revenue growth was led by pricing despite soft volumes aided by IP revenue.
INR revenue growth affected by appreciation of INR but in $ terms looks decent
Revenues came in at $62.1 mn up 2.2% sequentially but the rupee revenue rose by a modest
0.3% Q-o-Q mainly due to lower realizations of INR/USD (53.8 in Q4FY13 Vs 54.8 Q3FY13).
Revenue growth was led by traditional business (up 3.1% Q-o-Q) while IP revenue declined
1.7% sequentially. Lumpy nature of IP coupled with soft ramp-ups in certain IPs led to a modest
decline in IP revenues resulting in a 70 bps decline in contribution to 17.5%.Coming to mix,
onsite revenues grew 12.7% sequentially led by volume (+2.7%) and pricing (+9.7%) while
offshore growth of 0.5% was driven by pricing (+2.8%) as volumes declined 2.1% Q-o-Q.
Appreciation of INR and higher royalties' impact EBITDA margins: The EBITDA margin in
Q4FY13 came in at 23.6% down 121 bps sequentially and was primarily impacted due to
1.9% appreciation of the rupee in the quarter and higher royalties payments to IBM and HP.
However EBITDA margin benefitted from flattish employee costs sequentially. On the other
hand net profit growth of 4.8% Q-o-Q was better, aided by higher extraordinary income (forex
gains of Rs 66mn & excess provisions written back Rs 44mn).
Utilization dips on employee additions but fresh hiring brings in optimism: The company
added 251 employees as attrition declined from 16% in Q3FY13 to 14.4% in Q4FY13. On the
other hand utilization declined to 72.5% from 77.3% in last quarter. Company plans to hire
600-800 employees in FY14 and has already made 500 offers to fresh graduates who will be
joining in Q2 and Q3. The company plans to hike the wages by at 8.5-9% for FY14.
Recent acquisitions to boost revenue in FY14: The Company's acquisition of Novaquest in
Jan'13 contributed to $1.8mn of revenue in the quarter. Novaquest and its earlier acquisition
Doyenz continues to do well with client addition, though small in size. As part of the Client
Automation business from HP last quarter, PSL has inherited hundreds of customers globally,
some very large. PSL plans to now offer various endpoint and device management capabilities
to these new enterprises and expects the contribution from them to start flowing in the next 2-
3 quarters. Company added 54 new accounts during the quarter with 3 being large.
Management guides for a robust FY14: Management commentary on the product pipeline
was upbeat and expects FY14E growth to be higher than Nasscom guidance of 12-14% primarily
led by new deal wins, acquired IP ramp-ups and cross selling to customers of the acquired IPs.
However, we feel the company could face some pressure on margins due to rising VISA cost
and integration costs of its latest acquisitions. The company has guided for stable margins and
a capex of Rs 1,250 mn for FY14.
Going ahead, PSL is expected to cash in on the rising demand in its key areas of cloud, mobility,
analytics and collaboration. PSL has the benefit of an early mover in this space but however the
deal sizes have been low. We now expect revenue, EPS to grow 17%, 18% in FY14E and 17%,
17% in FY15E, respectively. We expect EBITDA margins to decline 154 bps in FY14E to 24.1%
led by HP related transition costs, partially offset by higher IP revenues. PSL is a mid-cap IT
company having one of the best EBITDA margins amongst its peer set by catering to high end
next gen technologies. On the other hand it has also delivered proforma earnings growth of
~17% over the past 3 years. Due to these reasons we believe PSL should command better
valuations compared to other mid-cap IT companies. We reiterate our Buy rating on the stock
and value the company at a slight premium compared to other midcap IT companies at 11x
FY14 earnings arriving at a target price of Rs 603.

Stays on course, Maintain Buy Bajaj Auto :: Centrum

Stays on course, Maintain Buy
Bajaj Auto (BAL) for 4QFY13 reported total operating income of Rs.48.4bn
(up 3% YoY but lower 12% QoQ) largely in line with our estimate of
Rs.48.6bn. EBITDA margin ( adjusted for gain of Rs.690mn of pre-payment of
sales tax deferral incentive) stood at 19.2% ( down 145bps YoY and 84bps
QoQ) lower compared to our estimate of 19.9% . Reported PAT stood at
Rs.7.7bn, higher by 4.3% vs. our est. on account of higher other income and
lower tax rate despite weaker operating performance. While the domestic
motorcycle growth is likely to remain moderate for FY14E, the company is
betting on Discover launches (6 new Discovers expected to be launched
starting in July) and aims at reviving its market share in the Executive
segment. However, it remains confident of achieving 10-12% volume growth
in domestic 3W segment for FY14E driven by its success in diesel 3W
segment, new upgrades by 2QFY14E and possible opening up of permits.
For exports, it has guided overall volume growth of 10-12% for FY14E. We
continue to remain positive on the stock and maintain our Buy rating with
revised target of Rs.2,132 driven by upward revision in earnings and roll
forward of valuations to FY15E from earlier Sept 2014.

ARPU disappoints Dish TV :: Centrum

ARPU disappoints
Dish TV posted Q4FY13 results below expectations with 7.5%YoY growth in revenues (2.3% below expectations) on the back of 0.2mn net subscriber addition with ARPU declining by Rs3 sequentially to Rs157 as subscribers downgraded to lower price point packages along with fewer number of days during the quarter. Operating margin declined by 22bps on the back of higher programming cost due to renegotiation of contract with MediaPro. We believe the recent increase in STB prices along with hike in package rates will augur well in the medium term as this will reduce churn along with subscriber acquisition cost though marginally impacting subscriber addition. With increasing focus on value & profitability, we maintain BUY rating on the stock.

Results below expectations: Dish TV posted 7.5% revenue growth to Rs5554mn on the back of 15.3%YoY growth in subscription revenues. Operating profit was at Rs1200mn up by 6.4%YoY with margins declining by 22bps. PAT loss was at Rs436mn. Exchange differences from foreign currency borrowing accounted as per AS-16 is now being accounted as AS-11. This change has resulted in net gain of Rs594mn which has been shown as exceptional item in FY13. The company has also reclassified its Q4FY12 results based on audited financials.

Subscriber addition in-line: In Q4FY13 the company added 0.4mn gross subscribers while net subscribers were 0.2mn with churn reducing to 0.8%. In FY13, total net subscriber addition was 1.1mn while gross subscriber addition was 2.2mn. Total net subscribers stand at 10.7mn. Subscriber addition during the quarter was low as the company increased STB prices by Rs300 in February. Going forward, management expects the net subscriber addition at ~1.1mn with marginal upside from Phase-II digitization. STB price hike has resulted in lowering SAC to Rs1996 during the quarter from Rs2201 in Q3FY13. Management expects this to further decline to ~Rs1600 over the next 2/3 quarters

ARPU disappoints: During the quarter the company posted Rs3 drop in ARPU on a sequential basis on the back of lower days in Q4FY13 compared to Q3FY13 and customers downgrading to lower price point packages. Average blended ARPU for FY13 was at Rs158 with management guiding Rs166 ARPU for FY14 on the back of the price hike in April 2013. HD ARPU for the quarter was at Rs414.

Punjab National Bank ROAs of 1% inspite of operational slowdown; BUY :: Prabhudas Lilladher

PNB's PPOP performance continues to get weaker (7% YoY contraction). However,
B/S consolidation and recovery efforts is aiding asset quality though delinquencies
continue to remain high. Despite just 4% PPOP growth and elevated credit costs
expectations, we expect ~1% ROAs (higher than peers) and with undemanding
valuations of 0.8x Sep‐14 book, we maintain ‘BUY’ with PT of Rs900/share.
However, re‐rating will be restricted, given lower ROEs v/s history + PPOP risks.
! Core PPOP performance gets weaker: PNB's core PPOP contracted 7% YoY, with
just 3% loan growth and ~15% contraction in core fees. Key metrics: (1) NIM at
3.5% was flat QoQ but management expressed near-term concerns and guided
to 3.35% margins v/s 3.5% in FY13 considering falling rate environment (2) In its
effort to consolidate, domestic loan growth was just 3%; positive for credit but
our FY14 NII is down 5% (3) Non-interest income was aided by treasury income
of Rs1.9bn adjusted for which core fees contracted 3% YoY. With weak guidance
on NIMs and risks to B/S and fee income growth, we expect PPOP challenges to
continue and expect just 4% PPOP growth in FY14.
! Asset quality‐Strong momentum in Recoveries/upgrades continue: PNB
reported better-than-expected Gross NPAs, with Rs26bn of upgrades/recoveries
in line with management guidance and they expect strong momentum to
continue. Incremental slippages continued to remain high at 3.8% and
restructuring of ~Rs35bn (excl. SEBs) indicates that stress continues in the
system. Slow B/S growth will help and thus, we factor in credit to remain
elevated at ~115bps v/s 140bps.
! ROAs of ~1% despite PPOP challenges, Maintain ‘BUY’: Despite slow PPOP
growth and ~115bps of credit costs, we expect ROAs of ~1% in FY14 (better than
peers) and hence, maintain ‘BUY’ as current valuations are undemanding at 0.8x
Sep-14 book. However, lower ROEs at ~15.5% v/s +20% historically + operational
challenges will limit significant multiple expansion. PT of Rs900/share (0.93x
Sep-14 book).

Sun Pharmaceutical : Best Getting Better:: Morgan Stanley

Sun is transforming its top-quality generic business
into a specialty company. We believe it can unlock
meaningful value from URL, DUSA, SPARC and its
own portfolio in the next few years. We expect 21%
EPS CAGR for F13-15, raise our PT to Rs1,159 (25x
F15e EPS) and stay OW. Added to Asia Best Ideas.
Deep dive analysis of new growth drivers in this
report: We address the current pressing issues with
Sun – SPARC products, unlocking value in URL and
DUSA, plus our view on Taro pricing. Net net, we believe
these new growth drivers can incrementally contribute
US$200mn to sales in the next 2 years (30% of growth).
We conducted an AlphaWise survey of 200
neurologists in the US for levetiracetam XR (1000/1500
mg, lead SPARC NDDS product), which may be launched
in 2013/14 (subject to FDA approval). The findings were
encouraging – 81% of patients are on a dose of 1000mg or
more per day, 70% of neurologists appeared amenable to
switch 30% of their patients to the SPARC product with the
possibility of a therapeutic switch (4% of the overall
market). We estimate US$75mn of sales.
Taro pricing outlook: Overall portfolio vulnerability to
new competition may be limited in view of revenue
diversification and entry barriers. However, nystatin/trim
(25% of Taro sales) poses a material risk. We have
assumed a 10% Taro sales decline in F14 (vs. F3Q13).
URL offers multiple product opportunities to grow
based on our competitive analysis of current and
discontinued portfolios. DUSA holds promise given its
underpenetration in the AK market. URL/DUSA can add
US$80-90mn sales by F15.

SAIL-MoS Budget gives reasons for delays; Most timelines NOT pushed out further, benefits only in FY15E:: JPMorgan

India’s Ministry of Steel (MoS) has released its FY14 Outcome Budget, laying out
the progress of various projects under its various subsidiaries. For SAIL, while
most of the projects have not been pushed out further, spending is NOT picking
up in projects like BSP expansion. For the first time, the MoS has given out
reasons for delays, though in most cases the delay has been blamed at the sub
contractor. From here, the key IISCO expansion seems to be on its way and in our
view, visibility on its full commissioning (some time later this year) should re rate
the stock as market moves to giving some value to the sunk capex.

India Infrastructure, Power and Industrials Floating Gems:: JPMorgan

In this report, we analyze four aspects of stock ownership i.e., free float,
institutional holdings, insider transactions and promoter share pledge.
Together, these are good indicators of share performance, in
conjunction with fundamentals of course

India Power Sector Merchants make merry ::JPMorgan

A trend line of merchant power volumes in India over the past three years is
remarkably flat, despite overall generation increasing by a CAGR of 6% over this
period. Barring a brief spike in ST rates around the previous general elections in
FY10, bilateral contract rates have been range-bound at Rs4.0-4.5/kWh. While the
peak power deficit in India decreased from 14.6% in FY08 to 9% in FY13,
merchant rates have not eased, supported by inflation in the cost of generation –
especially fuel, the absence of growth in volumes on account of the limitations
posed by the weak state of SEB finances, and restrictions on the use of domesticlinkage coal for merchant generation. We believe merchants will continue to
“make merry”, with a busy election calendar lined up over the next year,
encouraging data on SEBs undergoing a fresh round of tariff increases this fiscal,
and integration of the southern grid still ~1.5 years away.

Persistent Systems: Buy :: Business Line

Inflation indexed bonds: The nuts and bolts :: Business Line

Inflation indexed bonds protect both the principal invested and the interest against inflation. Even in a deflationary scenario, your principal will be protected and the RBI will return the amount you invest.

Stock strategy: Consider bear put strategy in Maruti :: Business Line

Maruti Suzuki (Rs 1,606.1): The long-term outlook remains positive for Maruti Suzuki, as long as it stays above Rs 1,315. However, in the short-term, the stock can turn weak. Key support and resistance are placed at Rs 1,509 and Rs 1,670 respectively.

A close below Rs 1,509 will trigger a fresh fall. In that event, the stock could touch Rs 1,482. On the other hand, a conclusive close above Rs 1,670 will trigger a fresh rally in the stock that could take it to astronomical heights.

F&O pointers: Maruti Suzuki saw an accumulation of open positions on the short side though the Maruti June futures is trading in premium of over Rs 10 with respect to the spot close of Rs 1,605.6. Both puts and calls witnessed accumulation of open interest, except 1,600 put, which saw a marginal decline. This indicates that the stock could head below that level.

Strategy: Traders could consider bear put strategy on Maruti Suzuki. This can be initiated by selling 1,500 put and simultaneously buying 1,600 put. They closed with a premium of Rs 14 and Rs 46.4 respectively. Maximum profit in this strategy is Rs 67.6 and the loss is Rs 32.4 a contract.

Maximum profit occurs if Maruti Suzuki closes at or below Rs 1,500. On the other hand, maximum loss occurs if Maruti closes above Rs 1,600.

Hold this strategy till the expiry or till Maruti hits Rs 1,500. Traders should bear it mind that buying and selling the options should happen simultaneously.

Follow-up: Last week, we advised bear put spread in RCom. The position is in neutral. Traders could consider holding it till the expiry.

Wait, don't buy now :: Business Line

It may be better to give a skip to the first series of inflation indexed bonds, while watching out for future issues. Here’s why.

LINKED TO WPI, NOT CPI

Being issued by the Reserve Bank of India, these bonds no doubt provide a safe, good way to start hedging against inflation. Deflation in India is unlikely, so there should be little worry about returns declining over the tenor of the bonds.

But in their current form, the bonds provide only a partial hedge against inflation and not a perfect one. That’s because they are linked to the wholesale price index (WPI) and not to the consumer price index (CPI). The RBI acknowledges that it is the CPI that reflects the inflation people face at large.

Says Rajesh Iyer, Head-Investments & Family Office, Kotak Wealth Management, “As of date, the challenge for an individual investor is that he is exposed more to CPI rather than WPI. Hence inflation indexed bonds may not be a perfect hedge against inflation.”

According to Pawan Agrawal, Senior Director, CRISIL Ratings, “The retail investors will find it more acceptable if the return on these instruments is linked to CPI, which is more relevant at the retail (or at the consumer) level.”

The RBI has indicated that in the future when the CPI stabilises, it may consider launching inflation indexed bonds linked to it. Till such time, these bonds are likely to be linked to WPI.

Inflation in April as per the consumer price index was 9.39 per cent, almost double the reading as per the WPI (4.89 per cent). The gap between the two has been widening over the past few months since prices at the wholesale level have been declining faster than that those at the retail level. If this trend continues, the ability of the current series of bonds to provide a complete hedge against inflation weakens further from the point of view of a retail investor.

TAX ASPECT

Inflation indexed bonds do not offer special tax concessions. So, both the interest received and the capital gains on the bonds will be taxable. Tax will reduce the ‘real’ interest (likely to be between 1.5 and 3 per cent annually) from the inflation indexed bond.

It is only towards bond maturity that a retail investor gets to realise the full advantage of the inflation protection offered by the inflation indexed bonds. On maturity, you will be repaid the adjusted principal amount which takes into account cumulative inflation for the entire tenor.

This will be higher than the nominal principal repaid in a normal bond or bank fixed deposit. But the regular interest received is much lower than that for bank deposits or other debt, because they reflect ‘real’ rates.

While capital gains (the excess of the adjusted principal over the original investment) will be taxable, the indexation benefit available on long term capital gains should lessen the tax burden significantly.

Inflation indexed bonds will be traded in the secondary market. Profit on sale will attract capital gains tax.

WISE TO WAIT

Inflation indexed bonds provide the best utility when inflation is rising. Currently, inflation in the country is moderating and this takes away some edge from the hedge. But given the long tenor of these bonds, one should take a long-term view of how inflation will pan out in the coming years. It is in this context that inflation indexed bonds should find a place in a retail investor’s portfolio. It may be best to time a buy in these bonds with an upward movement in the inflation rate cycle.

The RBI has said that the product structure of the exclusive series of inflation indexed bonds for retail investors will be finalised in due course. It seems wise to wait for this.

What’s the alternative?

Bank fixed deposits up to Rs 1 lakh are safe alternatives. Currently, the best rate offered on such deposits of more than 5 years is 9.25 per cent annually. On a post-tax basis, the real return on these deposits considering WPI-based inflation works out to 3.4 per cent for investors in the 10 per cent slab, 2.5 per cent for those in the 20 per cent slab, and 1.5 per cent for those in the 30 per cent slab. This indicates that an inflation indexed bond which offers a real rate of 2.5 per cent or less may be worthwhile only for investors in the highest (30 per cent) tax slab. Others could consider investing in comparably safe bank deposits for better post-tax real returns.

But this is assuming that inflation rates will not rise from here. If they do, this equation will change in favour of inflation indexed bonds.

Gold, a favourite of retail investors, delivered handsomely and beat inflation over the past few years. But gold does not protect capital and prices can correct from your entry levels, as they have done in recent months. Besides, gold returns are entirely from capital gains with no regular cash flows as from inflation indexed bonds.

Real estate also proved a rewarding investment in the past. But similar to gold, future returns are not certain, and prices could also fall. Real estate could generate regular rental returns. But this is a big-ticket investment and cannot be acquired in small lots.

State Bank of India: Sell :: Business Line

Ad rate hike to boost revenues Sun TV Network :: Centrum

Ad rate hike to boost revenues
Sun TV Network’s results for Q4FY13 were above our expectations. The company reported 10.7%YoY growth in revenues, 311bps fall in EBIDTA margin and 11.6%YoY increase in net profit. Sales growth momentum continued on the back of 14.6%YoY increase in ad growth while DTH and analog subscription revenues grew by 6%QoQ and 2.7%QoQ respectively. We maintain a Buy rating for the scrip with a revised target price of Rs487 (20x FY15 EPS).

Q4FY13 results above expectations: Revenues grew by 10.7% YoY to Rs4727mn on the back of 14.6%YoY growth in advertising revenues and 22.6%YoY growth in analog subscription revenues. Operating profit was up 6.2% YoY to Rs3486mn as margins contracted by 311bps. Profitability was up by 11.6%YoY to Rs1775mn, 5.5% above expectations.

Strong advertising growth: Advertisement revenues grew by 14.6%YoY during the quarter on the back of volume growth across channels. The weekday Prime Time advertisement rates (6 out of 9 Half-hour slots daily) on flagship channel Sun TV are being increased by 19% with effect from 15 July, 2013. Further rate hikes in other channels could happen before the start of the festive season. Management expects double digit ad growth for FY14.

Subscription revenues to grow: On a sequential basis analog subscription revenues grew by 2.7% and 22.6% YoY. On the back of strong DTH offtake due to Phase-II digitization, DTH subscriber numbers increased by 4.3% QoQ to 8.63mn and hence the company posted 6% sequential growth in revenues. International subscription revenues were flat on a sequential basis.

Strong quarter ENIL :: Centrum

Strong quarter
ENIL posted Q4FY13 results above expectations with 12.3%YoY (4% above expectations) growth in revenues on the back of 9.3%YoY ad growth. Operating profit was up by 6.4% YoY (19% above expectations) with 186bps fall in EBIDTA margin on the back of higher employee cost. Re-negotiation of the contract with T-Series and BCCL will boost margins in coming quarters. Lower tax rate on the back of savings from liquid investments boosted profitability as Adj PAT (for one time credit of tax of Rs28.6mn) was up by 16.2% YoY (31.8% above expectation). We maintain a Buy rating for the scrip with a revised target price of Rs285 (based on 16x FY15).

Results better than expectations: ENIL posted 12.3% topline growth to Rs1050mn on the back of 9.3% ad growth where events and activation contributed 33% to revenues. Operating profit was at Rs350mn up by mere 6.4%YoY on the back of higher employee cost (up 67% YoY) contracting OMP by 186bps. Adj PAT was at Rs228mn (up 16.2% YoY) due to higher other income and lower tax rate.

Ad growth momentum continues: Ad growth during the quarter was up 9.3%YoY on the back of increase in utilisation levels across stations. Blended utilisation rate was 93% with volume growth of 19% and pricing decline of 1.9%. Management has taken a rate hike in select markets and plans to hike rates across stations before the start of the festive season. Sectors such as FMCG (17% share), BFSI (14% share), retail (14% share), media & entertainment and Government/NGO posted strong growth during the quarter.

India Cements Performance Highlights -Angel Broking

India Cements (ICEM) posted a 61.3% yoy decline in bottom-line to `26cr on
account of flat realization on a yoy basis and steep increase in freight costs.
Although net realization was flat yoy, the company’s net plant realization was
down by 6.2% yoy at `3,250/tonne. The company’s net realization declined
2.8% on a sequential basis due to the steep price correction in Andhra Pradesh
during the quarter. Operating profit is down by 15.6% on a yoy basis. Volume
growth was moderate at 6.7% yoy.
OPM down 412bp yoy: ICEM posted a 8.1% yoy growth in top-line to `1,199cr,
which was in-line with our estimates. The top-line growth was aided by a 6.7%
increase in sales volume during the quarter. The company’s OPM fell by 310bp
yoy to 14.7% on account of steep increase in freight costs. The company’s freight
cost/tonne rose by 21.5% yoy to `990. Despite the fall in imported coal prices,
P&F costs remained flat on a yoy basis due to higher prices charged by Singareni
collieries and purchase of high cost power for Andhra Pradesh plants.
Outlook and valuation: We expect ICEM’s return ratios to remain subdued due to
substantial investments in subsidiaries. At the current market price, though the stock
is trading at a low valuation of EV/tonne of US$64 on FY2015E capacity, we
believe the same is justified considering the company's unfavorable locational
presence. Hence, we maintain our Neutral recommendation on the stock.