04 June 2013

Delhi-Mumbai Trip Tales: Fact Finding, Not Hiding… ::Citi

Delhi-Mumbai Trip Tales: Fact Finding, Not Hiding…
As part of an investor trip, we met with government, think-tanks and market analysts.
 Growth – Muted Expectations…— Most participants/officials we met expect FY14
growth to remain subdued in the 5.5%-6.5% range (Citi 5.7%): slowdown largely a
consequence of "not having anticipated supply side issues" and "institutional/regulatory
deficits", stalling projects. However, it's not all grim; project completions remain high
(see pg 2), and quite a few of the stalled projects were "bad proposals" to start with.
 …Getting it Back on Track, A Top Priority – Consensus suggests that (4.5%
3QFY13 GDP) is the bottom, thanks to some policy momentum and easing commodity
prices. However, challenges remain – (1) continued decline in new project intentions
and (2) weakening consumption, and consequently moderating ‘growth potential’
levels; now lower in the 6.25%-7.25% range. There could be some upside ‘delta’ (or a
more modest ‘epsilon’) due to the Cabinet Committee on Investments (CCI). While the
stalled project pipeline stands at ~US$150bn, CCI has reportedly cleared US$20bn.
 External: Structural "imports" likely to keep deficits elevated; INR range-bound –
Universal view that (supply-side issues + energy prices/demand (Oil & coal) + gold
imports) = Record Current Account Deficits (CAD). But for policy makers, recent
commodity tailwinds are not leading to CAD complacency, and thus efforts to increase
capital flows (especially debt) are likely to continue. The INR consensus moves up a bit
Rs53-55/US$ from the recent Rs54-56 level (See Europe Trip Tales)
 Inflation and Rates: Both Lower in FY14 – There’s consensus that WPI will be lower
(falling commodities & pricing power). And CPI (currently at 10.4%) should also head
lower on account of (1) Winter harvests and monsoon (2) Policy related measures –
food stocks, pricing. And rates should fall to the tune of 50-100bps. (Citi: 50bps)
 Fiscal: Consensus on 4.8% target; Reforms some time away – There’s confidence
that the FM will meet the 4.8% fiscal deficit red-line. But there’s disappointment that
"competitive politics" could result in a delay in tax reforms (GST, DTC); that there would
be the incremental cost of the food security bill (0.25%-0.5% of GDP) – albeit the pain
would be offset by a lower fuel subsidy
 Politics: Possibility of Early Elections? Scenarios – Experts put the probability of
an early election at 25%-30%; with 4 prominent scenarios; (1) BJP led coalition without
announcing Narendra Modi (NAMO) as the PM candidate (2) Non-Congress non-BJP
coalition with the outside support from Congress (3) BJP coalition with NAMO as its PM
candidate and (4) Congress led government. Two interesting comments were (a) the
next election could be viewed as a contest between "secular" v/s "corruption" rather
than one of leaders and (b) regionalization of Indian politics that may have brought
"instability at the centre" has also led to the growth of the lower classes.

Realty Check Launches perk up in Mumbai: JPMorgan

Investment view– BSE Realty index has underperformed the broader markets
over the past month despite a pick up in approval/launch activity, improving pre
sales momentum, rate cuts and easing funding environment, given the overhang of
impending cap raise issuances to comply with SEBI norms. Stock performance
has been fairly divergent over last month with IBREL (+50% M/M) & Bangalore
developers (+10-15% M/M) being stand out performers. We continue to
recommend investors buy companies which have finished older deliveries and
have started a fresh cycle of new launches. This would imply improving margins
and cash flows, which were impacted over the last 4 years due to execution
delays, cost inflation and high leverage. Prestige & IBREL fit this framework best
and are our top picks. IBREL offers marquee assets on book, growing rental
stream and improving cash flow profile (on the back of new launches). Prestige, in
our view, is expected to deliver meaningful scale up in cash flows & earnings over
next few Qs, given impressive pre sale performance and growing rental stream.
 Residential- Mumbai starts to gain traction: New launch activity across
markets has been fairly high since the beginning of CY13. Project approvals in
Mumbai finally seem to be gaining traction as reflected in the substantial pick
up in new project launches over the last few months. Most of these launches (i.e.
by Shapoorji, L&T, Kalapataru, Lodha) have garnered decent response given
last 2 years’ pent up demand. Gurgaon also witnessed soft launch of a luxury
project in Phase V, while Bangalore and Chennai have maintained their good
run as evident in strong booking trends registered by South based developers.
Prices in Gurgaon/ Bangalore remain firm. Unsold inventory is largely stable as
pick up in new launches has been accompanied by improvement in absorption
trends over the last Q. Deliveries are expected to see significant scale up over
the next few Qs with large project completions across key cities.
 Office leasing remains sluggish with Mar-Q absorption coming off by 30%
Q/Q. Supply however has been increasing as projects deferred from last year get
completed. With supply surpassing the demand, vacancy levels increased
marginally over the last Q. Among key markets, Mumbai is witnessing healthy
absorption trends & has seen new project launches. Bangalore however has
started to see moderation after being the standout performer over the last 2
years. Rentals across markets remain largely stable, though we see scope for
appreciation in select markets (Gurgaon, Bangalore) going into FY14.
 Retail segment witnessed some moderation in absorption in Mar-Q, after a
buoyant CY12. Lease enquiries remained robust, pointing to an expected pick
up in leasing activity in 2HCY13. New supply has also been fairly constrained.
Vacancy levels across key cities were largely stable with Grade A stock at
negligible vacancy levels; while Grade B peripheral malls witnessed low
occupancy levels. Rentals have started to appreciate and the trend is likely to
continue given limited availability of quality retail space and new international
retailers looking to enter the Indian market.

Volumes surprise positively, maintain buy JSW Steel :: Centrum

Volumes surprise positively, maintain buy
JSW Steel (JSTL) reported strong operational performance yet again despite tough market conditions with ~11% QoQ growth in consolidated revenues to Rs98.5bn on account of robust sales volume of 2.4MT (higher than our expectation of 2.2 MT). Cons. EBITDA stood at ~Rs17.3bn (margin of ~17.6% vs our expectation of 17.1%) and standalone EBITDA/tonne stood at ~Rs6810/tonne (up by 14% QoQ). Better flat product sales, highest ever export volumes and aggressive marketing led to volume outperformance but realizations remained flat QoQ due to subdued demand. JSTL has indicated an increase in iron ore availability going ahead, further reduction in costs of coking coal and sounded aggressive volume guidance of 9.75MT for FY14E. We revise our volumes estimates upwards to factor in the strong operational capabilities of the company and improving iron ore situation in Karnataka. Maintain buy with an upward revised target of Rs924.

Volumes surprise positively: Sales volumes stood at 2.4MT, up ~5% YoY and 12% QoQ, supported by better product mix, aggressive marketing and higher flat product volumes, up 15% QoQ at 1.9MT. Realizations remained flat QoQ as domestic demand was subdued. Export stood at robust 0.64MT (+46% YoY,+67% QoQ). Inventory stood at 0.57 MT at FY13 end

EBITDA margin in line: Robust volumes and lower raw material costs (coking coal down by ~10% QoQ) led to standalone EBITDA margin of 17.9% (up by 220bps QoQ). JSW optimized its blending of coal for coke making and also increased waste heat utilization which helped in improving margins despite low quality and high cost iron ore

Lanco Infratech :4QFY13: Normalized earnings above forecast: Nomura research

4QFY13: Normalized earnings above forecast

4QFY13 normalized EBITDA above/below our/consensus
forecasts…
At INR5.4bn, Lanco’s 4QFY13 normalized EBITDA came in 6% above
our forecast (INR5.1bn), but 4% below consensus (INR5.6bn); we peg
normalized EBITDA = reported EBITDA less prior period component of
[1] revenue received by Griffin Coal on account of retrospective upward
revision in price of coal supplied to Bluewaters (~A$44mn), and [2] ‘cash
compensation’ in certain EPC projects (INR135mn).
….normalized net loss lower than our forecast, magnitude unclear
In the absence of definitive clarity on any one-off tax liability on the
abovementioned prior period items, we peg Lanco’s 4QFY13 normalized
net loss at INR4.3bn (vs. our/consensus forecast at INR4.6bn/INR3.8bn);
reported 4QFY13 loss was INR316mn. Notably, if tax was paid /
provisioned on the prior period items at the applicable corporate tax
rates, normalized net loss could be INR3.2bn, significantly lower (i.e.,
better) than our/consensus forecast.


NIIT Technologies :TP: ` 360 Buy: Dolat Capital

View: We maintain our positive call on the stock post the earning call based
on its sustained strong growth, confidence on CY13 demand, robust order
intake and possibility of margin recovery. We maintain our BUY rating with a
TP of ` 360 valued at 7.5x of FY15E EPS of ` 48.
Confidence intact: The company is confident to do better than industry in
FY14 helped by robust 12M order executable book of USD 252mn. It expect
sustained momentum from its Manufacturing and Government clients specifically
in the US and Asia markets. Europe is likely to remain soft due to existing
economic uncertainties.
Results inline: Revenue in reported currency grew by 4.4% QQ at ` 5.4 bn
from ` 5.1 bn in Q3FY13 driven by strong growth in Government projects
(revenues up 47%, contributes 11% of revenues). Travel vertical witnessed
revenues decline of 7% as it exited 2 accounts during the quarter. Revenues
were strong across key projects and segments such as CCTNS, Morris, GIS,
ROOM solutions. However; Proyecta revenues were below par as the key
client Iberia continues to witness business ramp down.
New deal momentum on: NIIT Tech added fresh orders of about USD 110mn
during the quarter leading to USD 252mn of firm business executable over next
12 month basis. It has added 5 new clients (1 in Manufacturing, 2 each in
Transport and Government and a USD 10mn renewal from a BFSI client). The
company expects sustained demand even for the non-linear business segment
both for the managed services and transaction based services in the Morris
account.

Marico Industries :Back to being a well-oiled machine: Nomura research

Back to being a well-oiled machine
Improving fundamentals into
FY14; new businesses to aid LT
growth. Upgrade to Buy

Crompton Greaves Expect gradual recovery :: Prabhudas Lilladher

! High quality improvement cost led to miss in PAT: Crompton Greaves (CRG)
reported consolidated profits of Rs247m for Q4FY13, lower than our and street
estimates (PLe: Rs774m). International subsidiaries reported loss of Rs845m in
Q4FY13, higher than our estimate of Rs450m. Higher-than-expected stabilization
costs like quality improvement cost (high un tanking rate issue) and LDs led to
losses in subsidiaries. The company incurred cost of Rs770m in the quarter
related to stabilization cost (Rs3bn for FY13). CRG highlighted that stabilization
cost was high in the quarter due to quality improvement related cost but most
issues related to design and processes have been sorted and cost should trend
downward significantly in the next two quarters. Belgium-related restructuring
is completely over and most employees have parted in Q4FY13. Hence, full
impact of savings in employee cost (~Rs200m/quarter) should be visible from
Q1FY14. Operations in Hungary have stabilised faster-than-expected and the
plant has already delivered 18 power transformers in Q4FY13 and also has been
EBIT positive. Most of the incremental losses are from the Belgium and Canada
plant which is expected to reduce (as benefits of restructuring and quality
improvement exercise fortify and LDs reduces over the next two quarters). CRG
also highlighted that various initiatives planned by the company like improved
offering, global sourcing, manufacturing foot print and continuous improvement
initiatives programmes have delivered cost saving/margin improvement of
225bps for FY13.

NHPC Capacity addition fails to aid earnings :: Prabhudas Lilladher

! Q4FY13 Adjusted PAT down 40.3% YoY, FY13 PAT flat YoY: NHPC’s reported
revenue in Q4FY13 de-grew by 23.8% YoY, mainly on account of flat generation
growth (despite capacity addition from Chutak and Chamera 3rd Unit) and lower
incentives. The company has booked Rs3.6bn in OI and extraordinary heads on
account of cash received from DESU. Thus, adjusting to all these items, APAT
stood at Rs3.5bn, which is a de-growth of 40.3% YoY. PAF for FY13 is at around
85%.
! Targets 400MWs addition in FY14E: NHPC aims to commission Nimoo Bazgo
(45MWs), 2 units of TLDP 3 (66MWs) and Uri 2 (1 unit) Parbati III (260MWs) by
the end of FY14E. With the commission date of Uri 2 anticipated in June 2013,
the project has seen unforeseen slip-ups in the electro mechanical works.
Similarly for TLDP 4, since March 20, 2013, HEP is on a standstill on account of
stoppage of construction by HCC.
! Debtors – some respite: NHPC has realised close to Rs2.4bn from DESU and
interest thereon in Q4FY13. However, debtor position of Rs20bn is flat QoQ.
! Valuation and Recommendation: The stock is trading at a P/BV of 0.8x FY15E.
Further, pass-through of water cess in the tariff and receivables from various
SEBs continue to nullify the increase in ROE impact. However, capacity addition
and improvement in operational performance in a seasonally strong Q1-
Q2FY14E would be the key things to look forward to. We have downgraded our
numbers and TP based on lower capacity addition and incentives. We maintain
‘Accumulate’ on the stock.

J. Kumar Infraprojects Strong operational performance; sturdy order book; Buy :: Anand Rathi

Key takeaways
Strong operating margins. J. Kumar Infraprojects posted 10% yoy revenue
growth (23% qoq), lower than our estimates since revenue from certain major
projects had not been booked (it had not yet reached the threshold). The
EBITDA margin, however, improved 120bps yoy to 16.5%, taking the FY13
margin to 16.7% (vs 16.1% in FY12). For FY14-15, we have built in a
conservative 16%. Absolute EBITDA was in line with our estimate.
PAT higher than our estimate. PAT came in at `232m (up 2% yoy, 18%
qoq), 4% better than we expected. Higher-than-estimated interest was
nullified by a similar trend in other income. For FY13, PAT grew 11% yoy.
Strong revenue visibility led by robust order book. Supported by strong
order inflows, management is aiming at over 30% top-line growth in FY14.
We expect execution to pick up significantly in the next 2-3 quarters at some
of its major projects (Sion-Panvel, building project in Alwar, DMRC) and hit
the peak revenue-recognition stage. In FY13, orders of `21.3bn were bagged,
taking the order book to `37bn (3.8x TTM revenue). Also, orders of ~`7.5bn
in the Mumbai water transport segment are at the L1 stage. A bid pipeline of
over `60bn and a focus on cash contracts in urban infra are likely to raise
inflows in FY14-15. In FY13, the company has significantly strengthened its
position in Rajasthan, Gujarat and Delhi, besides Maharashtra.
Low gearing. The 0.3x gearing should support strong revenue growth in
FY13-15. Although we expect the leverage in FY14 to rise to 0.6x, following
the `2bn capex, the interest cost will not increase by a similar proportion (as
the company had taken buyers’ credit at significantly lower interest rates).
Our take. J. Kumar’s strong revenue and PAT growth is likely to return in
FY14-15. For FY13, it has declared dividend of `3.5 a share vs `2.3 in FY12,
resulting in a rise in the dividend payout from 9% to 13%. We retain a Buy,
with a target of `295, based on 8x FY14e PE. Risk: Project execution delays.

Dissector: Crude oil in sideways consolidation phase :: Business Line


India financials Interest rates off sharply - NBFCs benefit: JPMorgan

Bond markets have rallied sharply since end-March - both at the long and
short end. This has not been transmitted to loan and deposit rates yet – but
that looks likely now. We see NBFCs, wholesale-funded banks and PSU
banks as the key beneficiaries, in that order – driven by bond profits and
lower funding costs rapidly transmitting to NIMs. PSU banks benefit –
M2M gains on long bonds and the (we think) inevitable easing of deposit
and lending rates. We see the sector continuing to outperform - our
favorite plays are HDFC, LIC Housing, Yes and SBI.
 Rates down sharply. Interest rates have been declining since mid-Feb
and the pace has accelerated from April. The entire curve has shifted
down ~50bp since early April across both gilts and corporate securities –
bank CD rates are down 100bp in the same period. This has not had an
impact on lending and deposit rates as yet – but we think this is
inevitable in the coming weeks. The gap between base rates and AAA
yields has now widened to unsustainable levels.
 Key winners - wholesale borrowers. The most direct beneficiaries are
NBFCs – cost of funds is coming off fairly sharply. The NIM impact is
being accentuated by the stickiness in loan yields – primarily because
the rigidity in banks’ base rates has eroded competitive intensity. Loan
yields may come off, going forward, but we think the overall NIM
impact should still be positive. Among banks, the weaker deposit
franchises incrementally benefit the most – Yes, Kotak, IndusInd. The
banks should also see strong trading profits from corporate bond
books - Yes is a big winner on this front.
 PSUs should benefit too. The bond yields benefit the PSUs on multiple
fronts - a) M2M gains on their bond portfolio, even if most of their
duration is in HTM and there are negative offsets from pensions b) the
ability to liquidate excess SLR and switch to lending – demand will be a
headwind here and c) lower deposit and lending yields as liquidity eases
in the system. Deposit cost benefits are likely to be lagged as most PSU
banks have cut their exposure to bulk deposits over 2HFY13. SBI is a
clear beneficiary as they have the lowest base rate – it could be the
quickest to switch out of bonds to loans for a NIM pickup.
 Asset quality remains an issue. There is no visible pickup in
growth - indeed, one of the drivers of the bond market rally is the
weak growth environment which impacts both core inflation and
liquidity via weak loan demand. We, therefore, anticipate continued
weakness in asset quality, and believe that this could spread to private
banks – especially in the commercial portfolios like CV lending. This
could be a drag on some of the NBFCs and private banks, probably in
2HFY14 – unless rates fall sharply enough to trigger a growth revival.

HDFC In a Sweet Spot : Morgan Stanley

HDFC is in an enviable position – funding cost is
falling while loan yields are holding up (base rate
driven). This is causing spreads to expand while
gaining market share. Top line is expected to grow
at 20%+ over three years, which should help
multiples (at long-term average now) expand.
Funding costs have fallen sharply over the last few
weeks: There is an element of seasonality, and rates
usually decline in April and May. However, quantum of
decline this year is sharp – across various maturities,
HDFC’s borrowing costs have declined by almost
80-90bp. With inflation falling, this decline can be sticky.
At the same time, lending rates are holding up:
Given elevated LD ratios, banks are struggling to cut
deposit and hence base rates. This is helping HDFC
earn high incremental spreads. While banks will cut
base rates at some time, spreads for HDFC are likely to
remain resilient. On an incremental basis, HDFC is
earning an individual loan spread of 2.1-2.2%, which is
much higher than spreads on the individual loan portfolio,
in our view.
The lack of price competition is helping HDFC gain
share: Unlike previous cycles, when banks competed
on rates, this time they are unable to. As a result, HDFC
is growing at almost 10ppt more than the system. We
expect NII growth to top 20% for the next three years.
Strong growth, strong balance sheet, and average
multiples imply big upside potential: The stock is
trading at 3.7x book and 18x earnings (on core basis) on
F2014E. While this is not cheap on an absolute basis, it
is not expensive given HDFC’s earnings and balance
sheet profile. We expect multiples to expand well above
average levels. Our new 12-month PT, up on a higher
valuation for the parent, implies stock will trade at 4.1x
book and 19x P/E on F2015E.

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Forwarding you the Multiple Scrip’s Result Updates. Kindly click on the links to view the report.
 
 
 
 
 
 
 

Dr Reddy :: 4Q Results Ahead of Estimates; Management Tempers Expectations, Leaves Room for Positive Surprises. Raise PT to Rs2300:: JPMorgan,

DRRD reported 4Q revenue growth of 26% YoY ahead of expectations driven by
strong growth in NA, PSAI business. EBITDA margins declined 570bps YoY on
account of higher S,G&A costs. DRRD refrained from giving guidance for FY14
due to uncertainty in US on account of delays in regulatory approvals for new
products. In our view, following disappointments on guidance in the past on
account of similar delays, mgmt seems to be taking a more conservative view.
While we do not rule out potential delays in the US, we believe the product
pipeline remains strong and focus on complex generics bodes well. Despite the
stock being up 24% over past 12m, it still trades at 18xFY14E P/E, at 5%/39%
dis. to LPC/SUNP. We believe with mgmt tempering expectations, likelihood of
positive surprises are high. We maintain OW with revised PT of Rs2,300

SIP in MF or in direct equity? :: Business Line