28 June 2013

CLSA Greed & Fear - Exit neurosis and getting tough in China


         CLSA Greed & Fear- Exit neurosis and getting tough in China
The past week has seen an escalation of the normalisation scare with the surge in the 10-year US Treasury bond yield. GREED & fear’s guess is that the US yield curve has seen most of its steepening for now.
·         GREED & fear would personally be surprised if Ben Bernanke is not himself surprised, if not alarmed, by the extent of the sell-off prompted by his rather anodyne comments. GREED & fear takes the Fed chairman at his word that policy will remain data dependent.
·         The degree of the market turmoil must be viewed as hard evidence of the scale of the leverage in carry trades taken on as a consequence of the remarkably seductive incentive to put on such a carry trade provided by Bernanke’s “forward guidance”. It is not only US Treasury bond yields that have risen sharply but government bond yields almost everywhere as the “from-risk-on-to-risk-off” trade has once again proved to be highly correlated.



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Build your corpus based on long-term needs :: Business Line

I am 29 years old and work in a public sector undertaking. I want to invest Rs 15,000 every month through the SIP (systematic investment plan) mode. My risk appetite is high.
I also hold an insurance policy from LIC and have invested only in the EPF of my company. Kindly suggest some portfolios for starting investments in mutual funds. My investment horizon is 20 years.
Ashok Kumar
It is nice to note that you are starting on long-term investment quite early into your career. You haven’t stated your goals, but given that your time horizon is 20 years there is sufficient scope for building a substantial corpus over this time, especially as your risk appetite is high.
Since you are quite young, a portfolio heavy on equity or equity mutual funds is appropriate. As your surplus increases over the years, invest in PPF, RDs, gold and real estate as well to diversify and to maintain a balanced portfolio.
You have mentioned that you have an insurance policy. We presume it to be an endowment policy or a unit linked plan, both of which are expensive products and may not serve your long-term needs. But keep paying the premium till the lock-in period and later withdraw the amount. Take a term cover and a medical policy.
Coming to your query about starting SIPs in mutual funds, split your intended investment amount as follows:
Park Rs 4,000 each in IDFC Premier Equity and ICICI Pru Discovery — two mid-cap funds with a strong long-term track record. Invest Rs 3,500 each in Quantum Long-term Equity and Franklin India Bluechip to give stability to your portfolio with sufficient large-cap investments.
Review your investments regularly, say, once every year and carry out modifications, if necessary and to exit prolonged underperformers. For example, as you grow older, you may want to reduce mid-caps in your portfolio and opt for stable large-cap funds.
Our suggestion would be to have a target corpus based on your long-term requirements. This would help you channelise your savings appropriately. If you reach your intended level of accumulation ahead of time, move over the proceeds to safe debt options.
***I am running monthly SIPs of Rs 3,000 each in Franklin India Bluechip, IDFC Premier Equity and Quantum Long Term Equity. Also, I have been investing Rs 2,000 each in DSPBR Top100, ICICI Pru Discovery, Sundaram Select Midcap and HDFC Midcap Opportunities. All my goals are over the long term — more than 10 years into the future.
1. Is this portfolio appropriate for my requirement?
2. I would be having an additional Rs 35,000 to invest, as my home loan is set to be repaid shortly. What is the best way to deploy it in equity funds? I have term insurance and other such debt options.
Giri
You have mentioned that you have a term cover and other ‘such’ debt options. To clarify, a term cover is not a debt investment.
It is just a risk cover, where you pay premiums and your nominee would get the sum assured in case of any unfortunate event. You will not get any returns from it.
Now, you will be having Rs 52,000 to invest in mutual funds every month, which is a pretty large sum.
We do hope that you have sufficient investments in EPF, PPF, RDs, bonds etc., and also have reasonable emergency funds set aside.
In case you haven’t, we have still suggested a portfolio with reasonable debt component in it. That you will have repaid your home loan gives some comfort, which means that you will also also not have to direct any money towards real estate.
Coming to your portfolio, we suggest dropping DSPBR Top 100, Sundaram Select Midcap and HDFC Mid-cap Opportunities. These are quality funds but you already have schemes with similar portfolios.
Spread Rs 52,000 as follows: invest Rs 10,000 each in Franklin India Bluechip, Quantum Long-term Equity. Add Birla Sun Life Dynamic Bond and UTI Opportunities and park Rs 10,000 each in the schemes. Invest Rs 4,000 each in IDFC Premier Equity, ICICI Pru Discovery and HDFC Prudence.
We have suggested a relatively moderate risk portfolio as the amounts involved are pretty large. It is a large-cap dominated portfolio, with significant weightage given to debt avenues as well.
Review your portfolio once every year and weed out underperformers. Book profits in case of abnormal gains in market rallies and move the proceeds to safer investment options.

Tata Steel Management meeting takeaways : Barclays Capital,

Tata Steel
Management meeting takeaways
We met the management of Tata Steel. We sense an increasing willingness by the
company to look at strategic opportunities to raise cash flow and reduce leverage.
That said, we are concerned that: 1) capex needs will remain elevated until FY15E; and
2) we expect product mix to deteriorate further in the near term. While we don’t
doubt the viability of incremental capex, we remain concerned that weak operating
cash flows coupled with firm capex will lead to a further increase in gearing.
Focus on consolidation: Balance sheet consolidation appears to be increasingly a focus
area for the group. That said, we remain sceptical that the European asset sale will go
through smoothly (refer our report dated 11 April, European Assets on the block?). We
think sale of equity holdings (US$1.2bn) and non-core assets is more likely to continue.
We also sensed a need for geographical consolidation in the group. Management said
that the group would be more focused on India and believes that the investment in its
Odisha project is strategically important in terms of long-term business mix, balance
sheet de-risking and maintaining market share in India.
Capex to remain firm: The total capex requirement for Odisha phase I (3mt) has
increased to Rs240bn (vs. Rs190bn earlier) with an Rs80bn outlay p.a. over FY14-FY15.
There is no decision yet on the Orissa phase II project (another 3mt) timelines and
implementation. Tata Steel intends to spend US$500m p.a. in Europe on performance
improvement. There is no large capex planned in the overseas mining subsidiaries.
Product mix to deteriorate further: We have been highlighting that Tata Steel’s
product mix is moving more towards commodity grade HRC with a declining
contribution to the high-margin auto segment. We expect the mix to deteriorate further
in FY14E before improving after the commissioning of the CR mill in Q4FY14E.
Gearing to increase; covenants comfortable: We expect net debt to increase further over
FY15E (to US$12bn). We think debt covenants both in India and in subsidiaries remain
comfortable even after considering recent asset impairments/goodwill write-down.

DB - Indian Infrastructure - Needing much more than help from the weather gods

We are encouraged by the monsoon, which is above normal, widespread and
could help arrest the dip in India's water tables. This is good news for the
economy as a whole, as power deficits decline, both from lower demand from
the subsidized agri sector and higher supply from low-cost hydro. However, for
the majority of infrastructure projects, built on structural shortages, this would
mean a push-back in earnings. Notwithstanding strong 2H demand, we cut
Coal India estimates by 4% to factor in the likely H1 miss, similar to cuts we
made for the cement companies. Even for DG sets, sales may be pushed back,
not good news for CUMM (Hold) and merchant power player IPPs.

South Indian Bank- Risks wellrecognised;Upgrade to BUY! - Prabhudas Lilladher,

We upgrade South Indian Bank (SIB) to ëBUYí after remaining cautiousfor the last
nine months as (1) Some of the structural issues we have been highlighting have
played out with the impactrunning through the P&L now (2) We do notseeNBFCs‐
like risk to SIBís gold book and Infra book risks also seem limited (3) Moderation of
return ratios and possible asset quality risks have been more than factored in with
~30% drop in P/B multiples. Upgrade to ëBUYí with a PT of Rs28/share implying
1.1x Sep‐14 book (~30% upside).

Keep your finances flexible :: Business Line


With cash flows likely fluctuate for most working women, it is important to start early and save more.
Shreya, a 26-year-old techie, moved to Bangalore to join an IT company two years ago. Living on her own, going out with friends and merry-making aplenty left her with little money to invest.
Today, newly-married Shreya regrets that she didn’t save any money from the initial years of her career. Looking back she says, “I now realise how important it is to strike a balance between savings and spending. Its good to have fun, but saving for the future is essential too.”
The sudden flush of money, when you just start working, may tempt you to spend freely on luxuries.
But here are three factors that working women must keep in mind in planning their finances.

Future Retail Target price adjusted for De‐merger of Future lifestyle fashion: PhillipCapital

The record date for determining the entitlement of Equity Shares of Future
Lifestyle Fashions Limited (FLFL) to Shareholders of Future Retail is 24th June
2013. The exchange ratio has been fixed at 1:3 i.e. one equity share of FLFL shall
be issued and allotted for every 3 equity shares of Future Retail. The theoretical
impact of the demerger would be Rs 48/ share (based on swap ratio). Shares of
Future Retail purchased hereon would not receive any entitlement in FLFL and
hence we adjust target price downwardsfor the same. FRL isleft with the value
format biz i.e. (Big bazaar, Food bazaar etc.). We value the business at 8x
EV/EBITDA which translate into Rs 127/share.
With this de‐merger now FRL becomes largely a play on Hypermarket retailing
with some presence in Home and Electronics. As this a partial de‐merger (75%)
FRL continuesto hold 20% stake in FLFL.
We adjust our target price to Rs60 for this de‐merger and maintain our BUY
recommendation.

L & T Finance - Religare

Strong growth prospects to support premium valuations
We initiate coverage on LTFH with a HOLD rating and a Sep’14 TP of Rs 85/sh.
We like LTFH for its diversified product profile, strong parentage (subsidiary
of L&T) and skilled management. This coupled with a low base will ensure
industry-leading growth in the medium term. LTFH is also a leading contender
for a new banking licence which will further accelerate growth. Valuations
(lending businesses trading at 2.2x FY14E BV) are expensive given subdued
ROEs, but we are long-term positive and advise buying on declines.

Nomura research :: India Power Utilities & Coal -Govt moves to ease coal security risk for IPPs

What’s new: Government alters rules relating to linkage coal supply
and pass-thru of imported coal cost by power producers
The Cabinet Committee on Economic Affairs (CCEA) has approved a
new coal supply mechanism to power producers wherein:
 Generation capacity (projects commissioned post FY09 up to FY15)
eligible to get coal under Fuel Supply Agreements (FSAs) with Coal
India (CIL) has been widened to 78GW (including cases of tapering
linkage) from 60GW previously
 In the FSAs for the 78GW capacity, domestic coal availability from
CIL as a proportion of the Annual Contracted Quantity (ACQ) has
been pegged at 65% for FY14 and FY15, 67% for FY16 and 75% for
FY17.
 To fulfil the balance supply obligation under the FSAs, power
producers can source imported coal from CIL on a cost-plus basis or
import coal themselves. The higher cost of such imported coal
would be considered for pass-thru as per modalities suggested by
the central electricity regulator (CERC).
 Accordingly, the Ministry of Coal (MoC) and Ministry of Power (MoP)
would issue advisory and modify requisite Acts/Policies and bidding
guidelines to enable the electricity regulators to decide upon the
pass-thru of higher cost of imported coal on case-by-case basis.
 Subject to coal availability, Government would explore options to
supply coal to 4660MW capacity and other similar cases which do
not have any coal linkage but are likely to be commissioned within
FY15, have long-term PPAs and ‘high bank exposure’.
Implications for the overall power sector value chain…
 Although modalities will take time to be finalized and the fine-print
therein needs to be examined, the measures are positive for the IPPs
as they seek to mitigate fuel security risk for coal-fired projects, in our
view.
 Upon implementation, the likely obvious rise in wholesale power tariffs
would put pressure on distribution companies (discoms) to raise retail
tariffs and/or seek higher subsidy from the respective State
Government. We do note that if directives are complied with, discoms
are mandated to have a mechanism to pass-thru fuel-cost adjustments
in cost of power to the consumers periodically.
 What next – The MoC and MoP would move to modify the relevant
Acts/Policies via notifications (does not require parliament approval, in
our view). Thereafter, power producers can approach the regulator
seeking alteration in tariffs. Each petition would be examined on a
case-by-case basis, with CERC’s stipulated modalities would form the
basis of extent of the pass-thru of incremental coal cost.

Ashoka Buildcon - Religare

On a steady wicket despite sluggish order awards
As per our recent interaction with ASBL’s management, order progress in
the roads sectorremains sluggish and is likely to be back-ended this year.
In our view, the recent decision by government to allow exit mechanisms for
road developers (by introduction of substitute developers) from projects will
alleviate the bleak scenario in road sector. We remain positive on ASBL
given healthy revenue visibility across key projects in the next 12-24
months and a well-capitalised balance sheet. Reiterate BUY

Sun Pharmaceutical- Target Price (INR) 950 USD550mn payout is a mild hurdle on the M&A path: Avendus

SUNP and TEVA have admitted to patent infringement on gProtonix. Of
the windfall USD2.15bn payoff to PFE, the burden for SUNP falls at
USD550mn, payable in 2013. The payout a) Is significantly higher than
the cUSD105mn provision of 2QFY13; b) And cuts SUNP’s consolidated
net cash by c50%, the balance is held by TARO, to which SUNP has no
direct access; c) It reduces SUNP’s ability for an immediate big‐ticket
acquisition and even smaller, bolt‐on deals; and d) Though smaller in
impact, SUNP’s INR‐denominated cash reserves continues to take a hit
from the weakening INR. Our Jun14 TP is lowered to INR950; maintain
Hold. An immediate, knee‐jerk reaction is likely, led by the expected
impact on acquisition plans in the near future. However, with strong
cash flows, SUNP’s long term funding capabilities stay intact.

Morgan Stanley: Gas Price Hike: Path-Breaking Gas Price Reform Executed

We have been highlighting gas price reforms as a
key industry catalyst: Media reports (CNBC-TV18,
June 27) suggest that the Indian government has
approved an increase in gas prices from US$4.2/mmbtu
now to US$8.4/mmbtu, based on the mechanism
suggested by the Rangarajan committee earlier this
year. The new gas price mechanism is believed to be
effective from April 1, 2014 and is valid for five years.
Within our coverage, the key gainers are E&P
producers ONGC and RIL: Assuming the higher gas
price of US$8.4/mmbtu and higher INR/USD of ~58, we
project upside of ~39% for ONGC and ~20% for RIL for
our F2015 earnings estimates. At constant currency, we
estimate the earnings upside at 26% for ONGC and 4%
for RIL. We highlight that the incremental EPS
contribution for RIL from gas prices is higher in F2017
and beyond, when production is expected to increase.
We estimate upside risks to our DCF value at 14% or
Rs55/share for ONGC and ~3% or Rs27/share for RIL.
GAIL is likely to face for higher gas costs for its
petrochemical and transmission division: We
assess the downside risks to GAIL’s earnings at
~10-12% and to our target price at Rs32/share.
Impact on economy and consuming groups: Of the
total domestic gas volumes of ~86mmscmd, three key
economically sensitive sectors – power, fertilizer and
LPG – consume ~67mmscmd. We see additional
burden for them of Rs197bn or 0.16% of GDP. If this
were to be completely passed on to end consumers, we
believe electricity tariffs for a gas-based plant need to be
moved >45% higher. The required increase in urea
prices would be over 60%
We maintain our estimates and await more clarity
on details of the gas price mechanism: The Oil
minister has suggested to the media that he and the
Finance minister will provide more details on Friday.

Kotak India Daily: Change in Reco - JSW Energy; Updates - Lupin, Energy, NBFCs, Economy

Change in Reco
JSW Energy: Tricky trade; upgrade to ADD from SELL
l
Sensitivity to currency and coal prices remains high, stock reaction even sharper
l
Merchant prices have softened on early onset of monsoons, may revive subsequently
l
Upgrade to ADD noting sharp correction and favorable risk-reward
Company alerts
Lupin: Growth drivers in place
l
Recent launches and visible pipeline offer comfort regarding US growth
l
Domestic sales likely to be muted in the near term
l
We maintain ADD, increase target price to Rs800 (from Rs760), raise FY2014E-15E EPS by 1%/4%
Sector alerts
Energy: Like the hike
l
CCEA's decision to hike domestic gas prices; we expect US$8-10/mn BTU in medium term
l
Big boost to earnings of OIL and ONGC
l
Benefit to RIL could be meaningful, if gas production revives from current levels
l
Impact on GAIL to depend on subsidy burden
l
Manageable impact on power sector; higher urea subsidies to be offset by Government collections
NBFCs: Restrictions on private placement will affect financial flexibility
l
RBI guidelines for debt private placement by NBFCs
l
Time gap between issuances is a concern, in our view
l
Lower yield on bonds than bank loans
Economy
Economy: CAD provides a breather but trend unlikely to continue
l
CAD/GDP at 3.6% in 4QFY13; 4.8% in FY2013
l
Capital flows have been supportive but downside risks are increasing
l
External sector vulnerability reflected in the currency

O&G - Gas price doubled to US$8.4/mmbtu: +ve for ONGC, OIL, RIL & -ve for GAIL, IGL; Coal regulatory bill gets Cabinet nod; Mastek - Mgmt Meeting; Economy: BoP & External Debt Update (IDBICaps)

Oil & Gas Sector: Gas price doubled to US$8.4/mmbtu from FY15: Positive for ONGC, OIL & RIL; Negative for GAIL, IGL
  • In a major move, Natural gas price is doubled from current level to US$8.4/mmbtu from earlier US$4.2/mmbtu, which is effective from 01 April 2014 and applicable for all gas producers like ONGC, Oil India and RIL. The gas price hike would be revised quarterly and would be valid for five years i.e. till FY19.
  • This is significantly positive for ONGC, OIL and RIL, while it is negative for gas users like GAIL and IGL. We expect ONGC’s PAT to increase by Rs83 bn, EPS to grow by 31% (on a full year of higher gas price)and valuations to increase by 10-12% from our current target price of Rs336. Similarly, OIL’s PAT is likely to grow by Rs10 bn, EPS by 25% and valuation by 8%-10% from our current TP ofr Rs560. RIL’s PAT is expected to increase by Rs25 bn, while EPS to rise by 10% and valuation to increase by 5-6%.
  • This is negative for GAIL as they use domestic gas in their petrochemical division. We expect GAIL’s PAT would be negatively impacted by Rs8-9 bn (EPS impact is 15%), while valuation would be impacted negatively by ~12%. However, there is a likelihood that GAIL’s additional burden would be offset by an expected decline in subsidy burden.
§  Sudeep Anand (Sudeep.anand@idbicapital.com, +91-22-43221190) is awaiting for more details which is expected to come today. We would be revising our TP and ratings post that.

Chronicle of QE3 exit foretold ■Volatility is back ■Long-term yields up ■Stock exchanges down:: BNP Paribas

Renewed volatility in the financial
markets helped focus the attention of
the G8 heads of state, who were
meeting at the beginning of the week
in Northern Ireland, on the main
challenges that must be met to
promote long-term world growth. Ben
Bernanke was absent but he was in
everyone’s head. Over the past
weeks, investors react nervously his
statements. The Fed’s president
suggested that the central bank could
begin to slow the pace of its QE3
monetary easing programme in the
near future. In this context, the press
conference which followed the FOMC
meeting on 18 and 19th of June was
an occasion for him to clarify his
point. Ben Bernanke has never been
so explicit about the pace of changing
monetary policy in the near future.
This changing will be closely hinged
on macroeconomic data trends. A
QE3 exit is likely as soon as the
middle of next year, once the
unemployment rate has dropped to
about 7%.In the meantime, the
evolution in monetary and financial
conditions is also key. Along with the
analysis of economic data, the latest
will determine whether maintaining
the current massive monetary
stimulus is still accurate or not.

Tax Talk- June 28 :: Business Line


I worked in three different organisations for the financial year 2012-13 for 6 months, 1 month and 5 months, respectively. My total income for the financial year was Rs 3.2 lakh. I had to pay Rs 2 lakh as bond amount for getting relieved from the second company. Will I get tax exemption for the amount paid as bond money? I used my savings from the previous employer to pay the amount.
Albert
The bond payment of Rs 2 lakh made to your employer in lieu of getting relieved from the employment is an expense for you. Your income will be computed under the head ‘Income from Salary’ from three employers and you cannot deduct the amount of Rs 2 lakh against your income, as no specific deduction in this regard is prescribed under the Income-tax Act, 1961.

Coal India (COAL.BO) Buy: Value in the Coal Colossus  Citi

Coal India (COAL.BO)
Buy: Value in the Coal Colossus
 Buy — Post a 16% YTD correction, we see CIL as offering enhanced value. While the
commodities environment remains volatile, we like CIL given: 1) inexpensive valuations
– 9.2x Sep14E PE (Indonesian peers at 7-11x; CIL’s trading avg since Dec10 is 11.5x);
2) a cash-rich balance sheet (~35% of mkt cap; dividend yield ~5%); 3) earnings
upside (we forecast FY14 despatch growth at 3.4% vs CIL’s 6% target and lower yoy eauction
volumes/price); and 4) potential hikes in coal prices.
 Price hikes: by no means impossible — Though the timing/quantum of price hikes is
hard to predict, trends so far indicate CIL’s desire for margin protection. The board
approved a price rationalization wef 28th May13, namely: 1) +10% for low grade coal;
2) -12% for high grade coal; 3) special hikes for higher cost mines. Overall, according
to CIL, the price hike is likely to be ~4.8% (excl e-auction). Note: we forecast a blended
rise of 2% pa in FY14 and FY15 (potential upside).
 6% despatch growth target — CIL’s FY13 despatches grew at 7% vs. a 4% CAGR
through FY07-12. We believe if CIL attains its 6% despatch growth target for FY14
(492mt), it would provide comfort on the earnings trajectory. However, for now, we
conservatively assume 3.4% yoy growth in despatches to 481mt (488mt earlier) and a
rake requirement of ~198/day – leaving room for upside.
 TP incorporates Draft Mining Bill — Our TP of Rs360 (vs prior Rs365) is based on
two scenarios (50:50 weighting): #1 assumes no profit sharing – derived value of
Rs374; #2 assumes 26% profit sharing from FY15, for a value of Rs347. At our TP, CIL
would trade at 11.2x Sep14PE (excl OBR adj). We see upside to our TP if the draft bill
is amended so CIL has to share an amount equal to royalty with the locals (vs 26% of
profits), as CIL would likely pass the burden to end consumers.
 Sensitivity — PAT would rise ~3% if average realizations rise 1%. A 1% change in
despatches would impact PAT by ~1.5%.

CLSA HCL tech

Business as usual
Solid confidence on margin performance (ex-currency) was the key
positive takeaway from our interaction with HCL. Company margin
guidance of 18-19% for FY14 at Rs55/$ could well be beaten in our view.
Revenue growth should likely continue the trend seen in recent times –
strong infra services and modest growth elsewhere. Overhang from
immigration bill & a soft overall market sentiment implies stock re-rating
is unlikely but earnings should be good enough to support the stock.

Real Estate Wake up and smell the game change, er paradigm shift, er coffee:: Karvy

Wake up and smell the paradigm shift, er coffee
To us FY13 was disappointing but then again expectedly the sector
suffered due to: (i) budgetary changes; (ii) delayed approvals; and (iii) high
interest costs. Correction of such magnitude demands confidence to
outweigh caution as fundamentals on ground remains robust, presenting
an opportunity for investors to access high returns through bargain‐
basement purchases. BSE Realty now trades at one‐year forward P/BV of
0.6x and P/E of 11x.We initiate coverage on the sector with BUY.
Rear view not pretty – though rendering sector cheap on historical
Last 6M has seen stock prices of real estate developers getting cratered with
10‐50% absolute underperformance. The correction of such magnitude has
left the sectorlooking cheap relative to its historical valuations, with most of
the stocks trading at touching distance to FY09‐10 recession multiples.
Capex stabilizing ‐ realty an attractive end‐cycle assetreflation play
Our analysis of the real estate players asset portfolio suggest that bulk of the
office/retail assets have become commercially operational during FY13‐14E.
With Capex peaking out being supported by a more conducive interest rate
cycle, reflation shall help ease pressure on the parent’s balance sheet. Likely
beneficiary include DLF, Oberoi, Phoenix Mills & Prestige Estates.
Competitive positioning Real estate players
We have done macro(top down) and micro (bottom ups) competitive
mapping of Indian real estate players and screened developers with firm
grisp of their composure, right mix of defense (annuity assets) and offense
(residential) and relatively high transparency/governance. These developers
are maturing toward mid‐cycle cashflow stage with some of them now
having a stated dividend policy of distributing 20‐25% profits as dividend.
Valuation undemanding – Initiate coverage with BUY
DLF, Oberoi, Prestige & Phoenix are ourtop picks owing to a well balanced
mix of defense (annuity assets) and offense (residential). Sobha, Puravankara
& Kolte Patil are our pure play residential bets owing to strong launch
pipeline, history of meeting expectations & high dividend payouts in case of
the later two. Our stock selection offers high margins of safety owing to a
robust past track record of braving cycles and a more confidentfuture.

Titan plans to diversify further "Deutsche bank,

Fact:
** Titan proposes to change its name to “Titan Company Limited” from “Titan
Industries Limited” (it was incorporated as “Titan Watches Limited” in 1984).
** It plans to amend the “Objects” clause of Memorandum of Association
enabling it to enter newer businesses (excerpts below):
1. Hearing aids and related accessories
2. Apparel, garments, sarees, writing instruments, mobile phones,
musical instruments, lifestyle accessories, etc.
3. Rendering content through educational workshops, conferences,
theater, entertainment shows, gadgets, toys, DIY kits, activity books,
sports products, food and beverages, etc.
4. Kitchen appliances, storage shelves, kitchen utensils, chimneys, hobs,
furniture and cabinets, etc.
5. Products powered by solar energy
Deutsche view:
** While we believe that Titan is unlikely to aggressively enter many of these
new segments, the intention seems clear—to diversify from jewelry (which
accounts for c.80% of profits) in the medium term.
** While the company believes in its ability to incubate and grow new
business lines, it will likely face organizational challenges. It would require a
significant mindset change to incubate smaller business at this point, as the
jewelry division is c.INR80 bn in sales (in our view, there are parallels in
Hindustan Unilever’s Foods and Ice cream business—top management
attention and adequate resourcing are challenges faced by small businesses in
large companies).
Retain Hold
Titan's jewelry business model's attractiveness has diminished substantially
with the recent Reserve Bank regulation which effectively bans the 'gold-onlease' model. Even if we look beyond the near-term earnings cuts, the
overhang of further regulation (likely curbs on advance purchase scheme)
cannot be ignored. Recent stock correction reflects some of the concerns.
Retain Hold rating.