Goldman Sachs, Buy Tata Motors: JLR’s product cycle roars towards inflection; add to Conviction List

Buy
Tata Motors (TAMO.BO)
Return Potential: 27% Equity Research
JLR’s product cycle roars towards inflection; add to Conviction List
Source of opportunity
We add Tata Motors to our Conviction Buy List with a revised 12-m TP of
Rs368. We believe JLR is in a decisive phase of its multi-year product cycle,
as its average model age converges with European rivals over FY14E-FY15E
(currently 40% older), and its strongest brands get repositioned on an
innovative new aluminum platform. Our recent visit to its plants further
reinforced our view of a company which is rapidly transforming its
operations to support the step up in its product cycle. We revise our FY14EFY16E EPS by -6% to +2% (mainly driven by weakness in India earnings)
and are about 20% above Bloomberg consensus on FY14E-FY15E EPS.
Catalyst
We see three key catalysts – 1) Improving market confidence on cash flow
and EBIT margin sustainability over the next few quarters, as JLR reaps the
benefits of new models and an improving mix. We forecast consolidated
PBT to see a 30% CAGR over FY13-FY15E. 2) New product introductions or
announcements over next 12 months, such as new aluminum Discovery
and new variants of Range Rover and Evoque. 3) Significant phase of
annual product restocking in 2HFY14E, with improving deliveries to key
markets such UK and China, with the ramp-up in new Range Rover Sport.
Valuation
We raise our 12-m SOTP-based TP to Rs368 (from Rs361) based on revised
earnings and rolling forward to FY15E. Tata Motors is trading at over 20%
discount to global peers on Director’s Cut, and appears to be close to the
historical trough on BMW’s EV/DACF trading range. We also believe that the
current stock price arguably reflects the worst case for the parent India
business. Further, we note that its DVRs are currently trading at 48%
discount to the common stock.
Key risks
1) Higher cyclical pressure on the Indian truck demand front; 2) Higher fixed
costs from product launches; and 3) Stricter environmental regulations.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Asia Pacific Conviction Buy List

Jindal Steel and Power : Tepid 1QFY14; Buy-Back Looks the Right Thing to Do :: Citi Research

Jindal Steel and Power (JNSP.BO)
Alert: Tepid 1QFY14; Buy-Back Looks the Right Thing to Do
 To consider buy-back - JSPL’s board of directors has constituted a sub-committee
to consider the buy-back of shares and seek relevant approvals from lenders.
 Buy-back makes sense in our view - JSPL’s stock has corrected sharply due to
controversies related to captive coal, iron ore, concerns on new SBD and a decline
in steel/power realizations. The stock is now below FY13A book value of Rs226 and
replacement cost of assets of Rs258/share. Despite muted performance in FY13,
JSPL still generated RoE of 18% (adjusting for one-offs) and 15% on reported PAT
basis with operating cash flow of ~US$840mn. In such a situation, we believe
buying back the stock is a sensible step for long-term shareholder value creation.
 1QFY14 recurring PAT was 13% below estimate – 1QFY14 consolidated
recurring PAT at Rs6.5bn was below Citi’s estimate of Rs7.5bn. The miss was
mainly due to lower profitability of overseas operations. 1QFY14 Oman EBITDA at
US$15mn was below expectations. The South African mines had lower profits due
to a decline in coal prices. Further, the Mozambique mines had initial high start-up
costs. However, 1QFY14 reported PAT (including MTM on forex loans) at Rs4.9bn
was ahead of Citi at Rs4.2bn.
 Jindal Power’s realizations remain flat QoQ – JPL’s blended realizations at
Rs3.25/kwh were flat QoQ. PLF at 100% was high and generation increased 2%
QoQ. JPL PAT at Rs3.2bn was 9% ahead of Citi at Rs2.9bn.
 Steel sales remain strong – Blended steel realizations rose ~5-6% QoQ as
discounts were reduced. Realizations have fallen more than 10% vs last year. Sales
volume rose 18% YoY to 665kt; this compares to flat YoY demand for the country as
a whole. JSPL has increased its focus on exports – export volumes rose 220% YoY
and exports are now ~18-20% of the Indian steel business sales.

Prestige Estates Projects (PREG.BO) Buy: Good Start to FY14 – Well Begun Is Half Done! :: Citi Research

Prestige Estates Projects (PREG.BO)
 Buy: Good Start to FY14 – Well Begun Is Half Done!
 Top pick in India Property — We continue to like Prestige given its strong operational
performance, transparent NAV with high visibility, good disclosures and exposure to the
relatively better markets in South India. Post the ~25% correction in the last 2 months
(~20% underperformance vs Sensex), valuations at ~1.45x P/BV look reasonable.
 Strong start to FY14 — Strong sales in Q1 at Rs10.2bn (1.77msf) means Prestige is
well on track to achieve its FY14 guidance of ~Rs37bn. New launches at ~4msf (FY14
guidance of 14msf) helped fuel the strong sales. New leasing at 0.44msf (Prestige's
share of 0.16msf) was in line with FY14 target of 2msf. With an exit rental income of
Rs2.8bn, we believe the FY14 guidance of Rs3.2bn should be comfortably achievable.
 ~Rs56bn unrecognized revenue provides visibility — Prestige plans to launch
~10msf over the next three quarters and has unrecognized revenues of ~Rs56b, which
should support strong EPS CAGR over FY13-15E (even on a high base). Management
expects projects with accumulated revenues of ~Rs16bn to hit the ~25% recognition
threshold in FY14.
 Deliveries pick up; execution is key in the sector — Prestige delivered 2.48msf in
Q1, a big pick-up vs ~2.3msf in FY13. Execution remains the biggest ask from
investors in the property sector – sustenance is key.
 Dividends could go up over the next two years — Once the rental portfolio matures
and reaches ~Rs5bn run rate, the company plans to finalize a dividend policy wherein
~50% of rental income is paid out and the balance reinvested – helping Prestige add
~1msf annually without incremental borrowing.
 Change in Est; TP to Rs170 — We trim our ests marginally by ~1-2% incorporating
recent results, higher margins and interest/tax assumptions. We trim our TP to Rs170
factoring in: (1) revisions in net debt, customer advances and land bank, (2) marginal
increase in the tax rates to ~29%, (3) some push backs in the development portfolio,
(4) roll forward to Sep'14E from Mar'14E earlier. Our TP equates to ~1.8x Sep'14E BV.

VA Tech Wabag: Buy- Ambit

Heading for glory
Continuing momentum in India and international orders (1QFY14: up
60% YoY, 40% of FY14 guidance) supports our 20% revenue growth
and higher for earnings (over FY13-15) as EBITDA margins expand
steadily. Investor worries about international business and cash
collection will fade in FY14, as higher inflows and cost realignments
improve international profits and recovery of `1.5bn from Chennai
project improves cash flow. Present valuations of 10X FY14 eps are
non-respectful of VA Tech’s growing business momentum centered on
well-built competitiveness, cash rich balance sheet (1/4th of mcap) and
quality management. Maintain BUY and TP of `703, 13.5X FY15 eps.
Competitive position: STRONG Change to this position: STABLE
Business momentum sustaining and set to surprise: VA Tech’s order
inflows have gained momentum in 1QFY14 (up 60% YoY, 40% of FY14
guidance) on an already high order inflow base of FY13 (up 25% YoY). The
average order size of the top-10 clients increased 52% YoY in FY13,
highlighting the improving quality of order inflows. The strong order inflow in
the last 15 months would lead to 20% revenue CAGR over FY13-15.
Moreover, VA Tech could positively surprise on our above-consensus revenue
growth estimates for FY14, owing to strong order inflow.
International business (subsidiaries and IBG) concerns overblown:
According to our analysis, the international business accounts for 47% of
overall revenues. Whilst subsidiaries’ EBITDA margins (~3%) have
disappointed in the last two years, the International Business Group (IBG) has
earned the highest margins within the company, leading to a respectable EBIT
margin of 7.7% for the international business in FY13. We expect strong order
inflow in IBG and emerging subsidiaries (Philippines and Turkey) to drive 17%
revenue CAGR over FY13-15 in the international business. Also, investor
concerns on restructuring costs will fade from FY14, as the benefits of
employee restructuring and treasury operations will bear fruit from FY14 whilst
revenues from new regions increase.
Cash generation to further improve in FY14: We believe FY13 marks a
turnaround in VA Tech’s CFO profile (positive `817mn), despite increase in
Chennai project’s receivables to `1.5bn. We expect cash flow generation to
further improve from FY14, as it will receive payments for the Chennai project.
Management highlights cash collections/earnings find more focus than orders.
Our top pick in Indian E&C space given well-entrenched strengths: VA
Tech is currently trading at 10.4x FY14 consolidated EPS of `42.2, which is not
relective of its: (a) excellent technical and project management skills, (b)
capital-light business model, and (c) cash-rich balance sheet. We retain our
BUY stance and target price of `703. Key risks: Deterioration in working
capital cycle and higher-than-expected restructuring costs.

Dish TV:: HSBC research

Dish TV India Ltd (DITV IN)
UW: Lack of catalysts prevents near-term upside
 1QFY14 results were below estimates, but ARPU showed a
sequential improvement of 5%
 Muted volume growth remains a concern
 Maintain UW, and cut target price to INR55 (from INR59)

Wockhardt (WCKH.BO) Alert: Warning Letter Issues Not Trivial Warning Letter Issues Not Trivial :: Citi Research

Wockhardt (WCKH.BO)
Alert: Warning Letter Issues Not Trivial
Warning Letter Issues Not Trivial – A first read of the Warning Letter for
Wockhardt's Waluj facility indicates that the issues are not trivial in nature. We
maintain our view that it could take around two years or so for full resolution
although the company may be able to contain the financial impact through some
mitigation initiatives outlined earlier. We do not see further risk to our estimates and
valuations appear very attractive, leading us to retain our Buy rating while
acknowledging that upside may be limited till there is some sign of progress on
either resolution or the mitigation initiatives outlined by management.
Warning Letter First Read – As expected, the FDA has issued a Warning Letter
(WL) to Wockhardt’s Waluj facility and it is now available on the USFDA website
(link here). Deficiencies highlighted include:
1. Efforts to delay, deny or limit FDA inspection of the facility - some examples cited.
2. Failure to prepare batch production & control records for each batch of product.
3. Inadequate lab records - did not contain all data from all tests conducted in order
to make sure that the product complies to established specifications & standards.
4. Failure to record and justify any deviations from required laboratory control
mechanisms + the investigation towards the deviations was not comprehensive
enough to determine the extent and impact of the problem.
5. Inadequate training / experience for each person involved with the production
process to perform the function(s) properly - advises Wockhardt to develop a
robust CGMP training program to ensure the same.
6. Failure to provide adequate washing and toilet facilities in working areas as well
as documented evidence that updated cleaning procedures and studies
demonstrate effectiveness.
The WL advises Wockhardt to engage an independent CGMP expert to undertake
comprehensive inspection of the facilities, method, and controls used to
manufacture drugs, and determine whether the facilities, method, and controls used
to manufacture drugs are in compliance with CGMP requirements.
No Added Financial Implication – as we have already built in that complete
resolution could take around two years (as with Aurobindo's & Claris' facilities in the
past). Our estimates do not factor in any upside from the various measures initiated
by the Management to minimize the impact from the Import Alert.
Please refer to our past research on this issue for more details: 1) FDA Overhang
Queers the Pitch; 2) Worst Case on Waluj; Cut TP to Rs1,620; 3) Management
Call Takeaways – Worst Priced In; 4) It Gets Worse at Waluj – UK MHRA Import
A

BHARTI INFRATEL 1Q: largely in line ::bnp paribas

1Q: largely in line

RESULTS REVIEW
1Q largely in line; gross adds weaker than expected
Adjusted revenue missed our revenue by 1.3% while EBITDA and EPS beat
our estimate by 1.3% and 6.7% respectively. Gross adds for the quarter
were weak at 1,583 sites (4Q: 2,923) due to soft network rollout by telcos.
BHIN’s tenancy remained at 1.91x. The reported EBITDA beat was driven
by accounting change and cost efficiencies.
SUMMARY
Strong data growth and return of pricing power for telcos
Bharti Infratel is well positioned to benefit from data growth in India, in
our view. Indian telecom operators’ data revenue is increasing at a
healthy 20-25% q-q and falling 3G data tariffs could boost volumes.
Improvement in telecom operators’ RPM and profitability would improve
their ability to invest in networks which in turn would benefit BHIN.
VALUATION
No reason to significantly change our EPS forecast: BUY
BHIN trades at an attractive 5.1x FY15E EV/EBITDA, a discount to Indian
telecom operators at 5.8-7.1x. It has net cash of INR19 per share (13% of
CMP) and generates strong FCF. We do not expect significant changes to
our earnings forecasts on the back of the 1Q results. Capex was lower
than we expected, at INR3b, but the company retained its annual capex
guidance of INR20b. The average residual life of contract is 7.4 years.
Promoter Bharti Airtel has fully repaid its INR23b loan to BHIN. BHIN
continues to evaluate inorganic opportunities. Some of BHIN’s towers
merged with Indus Towers (Not Listed) effective 10 June, negatively
impacting revenue and costs with a net positive impact on EBITDA.

Goldman Sachs, Reliance Industries - Above expectation on other income; E&P, Capex outlook positive

COMPANY UPDATE
Reliance Industries (RELI.BO)
Buy Equity Research
Above expectation on other income; E&P, Capex outlook positive
What's changed
Reliance Industries (RIL) reported 1QFY14 PAT of Rs53.5bn, slightly higher than
Bloomberg consensus/GSe of Rs52.7/52.9bn, primarily due to higher than
expected other income (Rs25bn vs GSe of Rs22bn). Gross refining margin at
US$8.4/bbl was in line with our estimate, while petchem margins were slightly
lower than our estimates. Our key takeaways from the earnings meeting are: 1)
RIL management sounded more positive on the E&P outlook and regulatory
environment and is expecting the approvals for R Series fields in the next few
weeks. 2) Management indicated that all the major expansion projects are on
track with the two major projects - Petcoke gasification and refinery off gas
cracker (ROGC) – and expects them to be completed by mid-2015 as planned,
which is earlier than our expectation of 2HFY16. 3) Forex loss was Rs3.3bn on
interest expense and Rs53bn related to project-related LT debt was capitalized.
Implications
With the gas price hike announcement, faster E&P project approvals by govt
and the recent MJ-1 discovery, we think RIL management’s confidence in its
E&P business is increasing. We believe the effective implementation of the gas
price hike decision could help RIL ramp up KG-D6 gas production to a peak level
of about 50 mmscmd by FY17-18. Also, the new ventures of US Shale and
Domestic Retail are growing faster than we expected with US Shale EBITDA at
more than 10% of total and Retail revenues growing at more than 50% yoy. As
discussed in our August 16, 2012 report “Core capex to lift returns, rerate stock;
roadmap to US$100bn mkt cap. Buy”, we continue to believe that RIL’s major
capex in core segments will lead to a structural rise in its margins and cash
returns (+200 bps) over the medium term. This should re-rate the stock, in our
view, and pave the way for a near-doubling of earnings by FY17.
Valuation
We maintain our Buy rating and 12-month SOTP-based TP of Rs1,085.
Key risks
Low refining margin; further weakness in petchem margins.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Neutral

Goldman Sachs, maintain our Buy rating on Bajaj Auto

Bajaj (BJAUT IN, Buy, off Conviction List)
What happened
We maintain our Buy rating on Bajaj Auto and continue to remain positive on
company fundamentals. However, we remove the stock from our conviction
list and replace it with Tata Motors where we see higher relative upside on
account of the strong product cycle at JLR (currently at its inflection point).
Since we placed Bajaj Auto on our conviction list on Feb 15 2012, the stock is
up 14.7% vs. Sensex/BSE Auto Index up 8.8%/10.3% respectively.
Current view
Structurally, we remain positive on the global 2-wheeler space, due to
relatively consolidated nature of the industry, and growing base of consumers
at the bottom of the global economic pyramid. (See India Auto:
Deconstructing the 2-wheeler value creation engine; Buy Bajaj Auto, Feb. 15
2012. However, we cut our FY14E-16E EPS estimates by 9% to 14% on
account of the weak domestic 2-wheeler demand outlook given the backdrop
of continued weak consumer sentiment due to persistently high inflation
(especially CPI) and interest rates in the economy. We now see flattish 2-
wheeler domestic demand growth forecast for FY14 vs. prior assumptions of
11% growth with pick up in FY15/16 to 14%/12%.
We continue to maintain our positive stance on Bajaj Auto and maintain our
Buy rating as we still prefer the relatively more defensive 2-wheeler segment
when compared to rate sensitive pockets like passenger cars and trucks. Bajaj
Auto continues to deliver top quartile CROCI and industry leading EBITDA
margins on account of: 1) premium segment exposure in 2Ws, 2) first mover
advantage in exports, 3) FX benefits on account of INR depreciation as 33% of
its sales (in FY13) is derived from exports, and 4) exposure to higher margin
3-wheeler segment expected to get boost in the near term especially in
domestic markets with sanction of new permits in Hyderabad (~20K) and
Maharashtra (~30K). The stock is also on the GS SUSTAIN Focus List. Our cut
to EPS estimates are driven by sluggish domestic 2W demand but we still
remain positive on export growth outlook both for 2Ws and 3Ws. We raise
our 12-month P/E-based target price by 6% to Rs2,390 from Rs2,260 as we roll
forward to FY15E based target price. We now assign a higher target multiple
of 16.5X vs. prior 16X due to improved export growth and margin outlook as
well as relatively defensive nature of Bajaj Auto’s earnings, in our view.
Risks: 1) Longer-than-expected resolution of ongoing labor strike at Chakan
plant and any potential spill-over to other plants leading to loss of retail sales
and market share, 2) better-than-expected success of competitors such as
Honda and Yamaha, 3) higher raw material costs, 4) lower demand in India or
overseas markets, and 5) lower-than-expected consumer confidence.