13 July 2013

Larsen & Toubro -Guidance aggressive; valuation fair ■ Credit Suisse

Guidance aggressive; valuation fair
■ Expect margin pressures to continue. Led by a slowdown in industrial and
infra capex in India, we expect L&T to source 40% of its FY14/15 order flows
from the Middle East (M-E) and real estate segments. Four factors lead us
to believe that this should impact its margins: (1) historically L&T’s margins
have fallen with a rising share of orders from these segments, (2) real estate
orders are prone to delays, have a longer debtor cycle and impact PBT
margins, (3) its M-E entities have historically earned just 5-8% margins, and
(4) Korean E&C majors, with high M-E exposure, too, face margin pressures.
■ Order flow growth guidance likely to be missed. Based on our bottom-up
analysis, we expect L&T to deliver 11% (vs. guidance of 20%) order flow
growth during FY14. We believe at least 50% of its order flows are from
business segments that are impacted from sector-specific issues; which are
unlikely to be resolved soon. Thus, contrary to the common perception, an
expected easing in the interest rate cycle is unlikely to result in any
meaningful recovery of the investment cycle, in our view.
■ L&T has a poor track record of meeting its guidance. Over the past
decade, L&T has disappointed on at least two out of three parameters of its
guidance for seven years. Its margin guidance has mostly been missed.
Over the past few years, its guidance at the start of the year has been driven
by the hope of a capex recovery. This has proven optimistic leading to the
guidance revised down during the year.
■ But valuation derating likely to be gradual. L&T trades at 14x one-year
forward standalone earnings which appears expensive for muted 10% EPS
CAGR over FY13-15E. But, we believe its derating is likely to be gradual as
it would take time for the deteriorating order book mix to translate into weak
earnings. But, we do not rule out the possibility of few more orders turning slowmoving or dormant, which could lead to a stock correction. Maintain NEUTRAL.

City slickers Vodafone has materially outperformed listed incumbents Bharti and Idea in metro circles::Ambit

City slickers
Vodafone has materially outperformed listed incumbents Bharti and
Idea in metro circles over the last three years gaining AGR market
share particularly at the cost of RCom. In our second edition of the
Deep Dive we review the competitive position of these companies in
the metro circles that are likely to be early drivers for growth in data.
We also look into the central African trio of DRC, Congo and Gabon,
where contrasting telecom landscape presents diverse challenges and
opportunities for Bharti. Finally, we analyse the impact of the first
phase of consolidation in India that has resulted in improving
economics through volume growth and EBITDA margins rather than
increase in realised national tariffs. We find superior profitability has
enabled incumbents to reinvest margin gains in growing their weaker
circles through a trade off between tariff realisations and volumes.

Titan- Regulatory headwinds : Moving away from gold lease model to adversely impact earnings/returns: JPMorgan

Titan management today provided clarification on recent RBI notification on
changes to the current terms governing import of gold. These new regulations will
have significant impact on Titan’s gold procurement model as current practice of
gold leasing will no longer be feasible and credit of any kind for import of gold
for domestic use is prohibited. These regulations would adversely impact Titan’s
interest costs and ROCE for the jewellery business. Mgmt noted that more clarity
on the new structure will be available over next few weeks as they are exploring
various options. This would imply uncertainty on this name for the short term and
adverse change in the business model may also lead to multiple de-rating. We
expect near term weakness in the stock to continue post sharp correction

Reliance Industries - Gas prices hiked, positive for share price sentiment -JPMorgan

The CCEA approved a change in the gas pricing mechanism in the country
– moving to a formula linked to LNG import prices and global
benchmarks. This marks a significant turn from the earlier regime of fixed
pricing, and could incentivize additional exploration/investment. For RIL,
a full resumption of E&P activity at the D6 field, along with a higher price
making reserves economically viable, would be a positive catalyst.

NMDC (NMDC.BO) Upgrade to Buy: Bottom Fishing: Citi

 Upgrade to Buy, TP Rs120 — NMDC has fallen 25% in three months (global $ ore
prices down 17%). The stock price seems to reflect one of two scenarios: 1) implied PE
of 6.7x (global peers at 6-10x); or 2) earnings downgrade expectations. We think
NMDC should trade at the global average (~8x) − high margins, rich ore, domestic
exposure, a cash rich balance sheet may warrant a premium; pricing uncertainty
perhaps offsets these benefits. Asset value (20+ yrs life, low costs) and dividend yield
(~6%) suggest upside; even as we lower ore price estimates (-10% vs. NMDC’s current
prices).

Not afraid to borrow & invest in Indian equities: Jhunjhunwala (Video) ET




http://economictimes.indiatimes.com/et-now/experts/not-afraid-to-borrow-invest-in-indian-equities-jhunjhunwala/videoshow/21020634.cms