NMDC Ltd Strong balance sheet at compelling valuations :: Sunidhi

After subdued production growth in the past (CAGR of -1.8% in FY08-13), we expect iron
ore production to perk up going forward on the back of impressive capacity expansion and
relatively firm domestic demand. Going forward, we anticipate production and sales will
grow at a CAGR of 5% and 6.5%, respectively, in FY13-15E. The stock has been under
pressure in the recent past on the back of the overhang surrounding the company’s
investment in the steel business and a steady drop in iron ore lumps realization. However,
we feel the present overhang is overdone. We believe that iron ore supply is getting
tighter in India, which will help NMDC in maintaining strong margins. We believe, iron ore
sales volume pick-up, inexpensive valuations turns the risk-reward trade-off favorable for
NMDC.
Pricing concerns remain but would fade eventually
NMDC’s stock price has been under pressure in the recent past on them back of concerns
over the unexpected drop in iron ore lump prices and recent weakness in global
commodity prices. We, however, believe the decrease in lump prices was in the offing as
the cost dynamics of the sponge iron industry resulted in closure of several sponge iron
units in Chhattisgarh resulting in consequent pressure on iron ore lumps demand and
prices. Moreover, the current cost dynamics were tilted towards usage of pellets instead
of lumps for domestic steel manufacturers. We, believe that concern on pricing still
persists given price difference between Odhisa players and NMDC. However we believe
that such difference would eventually fade out post M.B Shah report on illegal mining.
Capacity expansion on track to aim a gain in market share
The company has undertaken a capacity addition programme wherein it is on track to exit
FY15 with a mining capacity of 48 MT from 32 MT in FY13. The plan includes increasing the
existing capacity of Bacheli Complex in Chhattisgarh from 15 MT to 17 MT, a new mining
block in Kirandul complex, Chhattisgarh (capacity :7 MT) and a new mining block in
Kumaraswamy, Karnataka (capacity :7 MT). It has also been working on a plan to augment
its excavation capacity by increasing the rake loading capacity. NMDC is also mulling over a
dedicated slurry pipeline with its major customers that will provide further fillip to its sales
volume.
Other ventures like pellet plant in offing…
The company is also setting up a pellet plant with a capacity of 1.2 MT in Donimalai,
Karnataka. We believe pellet sales will drive incremental EBITDA for the company on the
back of optimal and captive raw material feed. The company proposes to use only 40% of
its fines produce as the raw material feed for its pellet plant and intends to use the idle
slimes lying at its mining complex in Karnataka as the remainder of raw material feed.
Valuation and Recommendation
NMDC has robust balance sheet with a healthy liquidity position (cash as of FY13 end at
210bn) . We have modelled an iron ore sales volume of 28.4 MT in FY14E and 32 MT in
FY15E. We have valued the stock at 5x FY15E EV/EBITDA thus arriving at a target price of
150 Possession of superior quality iron ore reserves, the company’s position in the lower
quartile of the iron ore cost curve & dominance in domestic market reiterate our positive
stanc

GMDC Ltd Volume growth to come back :: Sunidhi

Multiple disappointments have led the GMDC share price to free fall, we believe
pessimism is overdone and expect some rationality to return once volume shows sign
of stability. We believe volume could regain normalcy at its Tadkeshwar mine as seam
thickness is getting closer to 7m. We believe Tadkeshwar could scale back to 0.6-0.7
mn tonnes run rate from Q3FY14 onwards making total volumes at c.2mn tonnes. We
expect complete normalcy by FY15 to 2.2 mn tonnes. Secondly Volumes at Bhavnagar
mines are continuously getting affected due to teething problems of overburden
dumping. We believe the problem is more genuine and serious as it relates to land
acquisition for overburden dumping of capacity addition which company expected to
increase to 5mtpa. However previous estimates across the street were at 3-3.5MTPA
from Bhavnagar mine, which are now getting rationalized. But we believe company
would be able to maintain 2mtpa volume in FY14.
What is share price factoring? We believe multiple factors led the de-rating
GMDC share price has been witnessing severe pressure since Q3FY13. We underpin
following reasons for such a downfall i) Volume de-growth ii) delay in Lignite price hike
ii) Thermal power sub-performance iv) allocation of cash flows towards low return
wind generation business. However of these reasons cited, we believe weight age to
the volume and price hold the substantial value. We also believe that these factors
are time bound and have the potential to recover going ahead. We continue to believe
the robustness of demand of lignite in Gujarat and monopolistic nature of GMDC. We
also continue to believe that GMDC has the pricing power and would be utilized in
course of time. We never took such price hike in our estimates for FY14, understanding
bureaucratic nature of operations. However at CMP of 78 stock seems to factor in
volume similar to FY10 and a multiple of 4x EV/EBIDTA, which we believe is a perfect
case of irrational exuberance.
Umarsar mine ready with wildlife clearance, State level permissions pending, Make
us believe volume growth underway
GMDC secured wid life clereance of Umarsar mine two months back and has been
waiting for various state level miniscule permissions before it can issue tender for
contract mininng. However drilling work is getting delayed, which was expected to
start by now. Considering cautious scenario we now remove 0.5mn tonne from our
FY14 estimates, however there exist a bright possibility of Umarsar contributing in
FY14. We also cut our estimate from other mines given weak june volumes. We Now
cut our volume assumptiions to 11.6mtpa from 12.2mtpa.
Valuation and Recommendation
We now factor in volume estimate of 11.6 mn tonnes for FY14 against 12.2mn tonnes
earlier due to 0.5 mnt lower volume at Umarsar and other mines due to early monsoon
adjustment. We continue to believe in company’s overall strength and believe these
issues can be overcome in near future given strong execution done in the past. We
value GMDC at 5x of its FY14E EBIDTA and maintain our BUY recommendation with
target price of `153.

Yes Bank - Growth concerns overdone :: Sunidhi

Yes bank is one of the newest private sector banks in the country. Set up in 2004
by Dr Rana Kapoor, the bank rapidly expanded its balance sheet. The bank today,
has a total asset base of `1008 bn and a branch network of 475 branches. Despite
the disadvantages of being a new bank, such as a small branch network and low
CASA base, Yes Bank has consistently managed to maintain its ROA within a
narrow band across business cycles.
NIM compression concerns overdone
Yes Bank’s NIM has improved from 2.8% in Q1FY13 to 3.0% in Q1FY14. This is due to
the consistent improvement in the bank’s CASA ratio on deregulation of savings
deposit rates. The banks CASA ratio has improved to 20% in Q1FY14 from 16% in
Q1FY13. Additionally the bank has a high proportion of floating rate advances at ~
90%. As a result, advances re-price almost immediately while deposits re-price as
and when they reach maturity. This helps the bank protect its NIM. Management
has also clarified that bulk deposits do not pose significant threat of immediate
repricing as 86% of its deposits are contributed by less than 0.2% of total deposit
base individually and cost pressures would be mitigated through judicious
monitoring and lending rate hikes.
Asset quality appears comfortable
Yes bank has the best asset quality amongst its peers with %GNPAs at 0.22% and
NNPAs at negligible levels. The banks slippage rate stood at 0.6% in FY13. The banks
knowledge banking approach has helped keep asset quality issues at bay. Going
ahead we do not expect asset quality to deteriorate significantly as the bank has a
well diversified loan book with limited exposure to risky segments. Additionally the
bank has a strong provision coverage ratio of 88.5% which would act as a buffer in
case of asset quality deterioration. Its restructured book too is negligible at `1395
mn or 0.29% of advances.
Loan book to grow at a CAGR of 24% from FY13-15
Due to its small size the bank, has managed to grow its loan book at a rapid pace,
well above that of the industry. Loan book grew at a CAGR of 38% from FY08-13.
Going ahead we expect the bank to continue growing at a pace faster than that of
the industry. We have factored in a loan book CAGR of 24% from FY13-15.
Lower RWA as a proportion of total assets to free up capital
Yes bank has managed to bring down its total risk weighted assets to total assets
from 67.8% in FY13 from 80.6% in FY09. Going ahead we expect this ratio to
improve further to ~ 62% in FY15. Lower risk weighted assets as a proportion of
total assets would help free up capital for the bank and reduce the additional capital
requirement for the bank.
Buy with a target price of `491
At the CMP of `287 the bank trades at 1.5x its FY14E ABV and 1.2x its FY15E ABV.
The stock price has corrected sharply off late on the back of RBI’s liquidity tightening
measures. As a result Yes Bank is one of our top picks in the banking space with a
price target of `491 (2.5x its FY14E ABV).

Federal Bank Ltd Return ratios to improve :: Sunidhi

With the RBI looking at issuing new bank licenses, competition in the banking industry
is expected to heat up. In such a situation the future of old private banks which are
smaller in size and geographically concentrated appears uncertain. In our opinion one
of two scenarios are likely to play out 1) old private banks especially those with poor
profitability and asset quality concerns could become takeover targets for new private
sector banks and 2) larger old private banks could scale up operations and re-engineer
business processes to bridge the gap between themselves and new private banks. This
in turn could lead to a re-rating in the stock price of these banks. Given its large size
and proactive management, we believe that Federal bank is amongst the best placed
old private sector banks to make the transformation into a new generation bank.
NIM likely to improve to 3.4% in FY15
Federal Bank reported a NIM of 3.1% for Q1FY14, which improved sequentially by 6 bps.
The NIM improvement came on the back of a reduction in bulk deposits and an
improvement in the CASA ratio. Going ahead we expect Federal Bank’s NIM to improve
further as the bank continues to focus on reducing bulk deposits and improving CASA.
Non-interest income to pick up going ahead
Federal bank’s initiatives such as tying up with foreign banks for raising LC’s, installing
CRM solutions to identify cross selling opportunities, leveraging on NRI clientele to
increase other income etc would lead to a pick up in fee based income going ahead. We
expect fee based income to grow by a CAGR of 18% from FY13-15.
Asset quality impacted by volatile slippages in the corporate segment, SME, Agri and
Retail slippages in check
Federal Bank revamped its processes to improve asset quality. Some of the measures
undertaken by the bank included – separation between loan sourcing and sanctions,
improving loan appraisal systems and focus on credit monitoring and collection. Post
the revamp, the bank has managed to keep in check slippages in the SME, Agri and retail
segments. However volatile corporate slippages have impacted asset quality. Once the
economy stabilizes, corporate slippages are likely to stabilize. Additionally the bank has
a strong provision coverage ratio of 81% including technical write offs. This will act as a
buffer in case of asset quality deterioration.
Adequately capitalized
The bank is adequately capitalized with a capital adequacy ratio of 15% almost entirely
comprised of Tier 1 capital. As the bank leverages on its capital, return on equity is likely
to improve going ahead.
Buy with a price target of `547
At the current market price of `318, the bank trades at 0.8x it FY14E ABV and 0.7x its
FY15E ABV. We believe the worst in terms of NIMs compression, asset quality and
return ratios is behind us and focus on strong and profitable growth, prudent lending
and likely improvement in asset quality will drive earnings growth going forward. Thus
we have a Buy rating on the stock with a price target of `547 (1.5x FY14E ABV adjusted
for slippages from restructuring).

Cadila Healthcare Ltd Multiple triggers ahead; Maintain Outperform :: Sunidhi

Domestic formulations to post above industry growth rate
Domestic formulations faced hurdles during Q1FY14 on account of inventory adjustment
pre-implementation of pricing policy and trade related concerns but growth will be
normalized from Q3FY14. Its key segments like GI, Gynaec, respiratory & Derma
continues to do well while it needs to focus on CVS & CNS segments. We expect
company’s domestic formulation segment to show a CAGR of 14% over FY13-15E on back
of new launches.
Expect strong growth in Wellness segment
After posting muted growth in Wellness segment in FY12 due to stiff competition, growth
came back on track in FY13 with 19% growth on account of huge promotional spending.
Company maintains its leadership position in Sugarfree (92% mkt share) & revamped
entre everyuth brand version. We expect Wellness segment to show 16% CAGR over
FY13-15E.
US business to see traction by FY15 backed by niche pipeline
Cadila is the fastest growing company in US which showed 39% CAGR over FY08-13.
However growth will be impacted in FY14 due to delay in new approvals & price erosion
in existing products. Management expects only 5-8 approvals in FY14. However shortfall
in FY14 will be covered in FY15 where we will see traction in business as the company has
strong pipeline in US. Cumulatively ANDA filings stand at 179 out of which 78 are
approved. Total filings include 4 topicals, 5 nasal sprays & 26 injectables (19- through
patners & 7-owned) out of which 8 injectables (7 through patners & 1 owned) are
approved with 6 launches (5 through partners & 1owned). Since Moraiya facility received
USFDA clearance in July 2012, growth in US is expected to be strong as it has done
injectable filings & nasal sprays from this facility. Cadila has also started filing for
transdermals (3 filed) & expecting approval in FY15 which will be the next long term
growth driver for the US market. Nesher acquisition will also prove beneficial in the long
run as it is in a niche segment of controlled substances. Till date it has launched 2
products & likely to launch 2 products (1 controlled substances) in 2013. We expect
revenue CAGR of 18% over FY13-15E.
Emerging markets to continue to show momentum
Company has filed cumulatively 102 dossiers in Brazil out of which 40 are approved.
Company has filed 6 dossiers with regulatory authority in Mexico taking cumulative filings
to 20. We expect Cadila to post steady growth in emerging markets like South Africa,
Brazil & Asia Pacific.
Retain Outperform rating with the target price of `1011
At CMP of `708 the stock is trading at 17.2xFY14E & 13.3xFY15E EPS. Going ahead, we
believe domestic growth will be normalized from Q3FY14 and will be able to grow above
industry growth rate in FY15 & US business to see lower growth in FY14 due to delay in
approvals but it will ramp up in FY15. We continue to remain positive on stock &
maintain Outperform rating with thetarget price of `1011 at 19XFY15E of `53.2

Unichem Labs Poised for strong growth; Maintain Buy:: Sunidhi

Domestic growth to be back on track backed by focused promotional strategy
Domestic formulation business faced hurdles in the market during Q1FY14 mainly on account
of inventory adjustment in domestic market on the onset of drug pricing policy, trade issues
in Maharashtra & lower industry growth. But we believe domestic business growth will be on
track as the company has already strengthened its field force domestically to 3000 including
managers and is now looking to improve its productivity (currently 2.9mn). Attrition rate has
also come down significantly to 11-12% (earlier 35%). The domestic restructuring exercise at
distributor’s end is almost over and now company has started focusing more on C&F agents &
inventory days have been reduced to 30 from 80. Currently 1/3rd business comes from C&F
agents & rest from distributors.
Unichem’s top 10 brands & top 50 brands contribute nearly 50% & 83% of domestic revenues
respectively. Among top 10 brands, Tg-Tor group & Ampoxin are posting flat growth due to
stiff competition from low cost players. Company is trying to improve growth in its matured
brands through focused promotional strategy on general physicians & also focusing on other
high growth brands like Unienzyme & Telsar group to improve its overall domestic growth.
We expect revenue CAGR of 12% over FY13-15E driven by sales productivity through
increased sales force & marketing strategies taken by the management.
Exports will post flat growth due to slowdown in contract manufacturing
Export formulation business is impacted due to pressures in contract manufacturing business
from Ghaziabad facility on account of price erosion seen in existing products supplied by the
company. We expect revenues of around `800mn from CMO business in FY14E & FY15E
respectively. However Emerging markets business & US will continue to do well. In Brazil 16
products have been filed out of which 2 products (Anti-infective & Pain therapy) are in
market. Management expects 2 more approvals (CNS & Cardiac therapy) in FY14. Company’s
total ANDA filings in US stands at 29 and received 15 approvals out of which 10 products have
been commercialized till date. Management gave guidance of 1-2 ANDAs filings per quarter
to increase total filings to 34-35 & 3-4 product launches in FY14.
Management has identified 10 molecules to be filed in FY14-15 mainly from CNS, CVS & pain
management & 10-15 oral prefilled syringes to be filed beyond FY15. Company sold its Indore
SEZ unit to Mylan for `1600mn & proceeds will be used for capex plan at its formulation, API
plants & pilot plant in bioscience segment. We have not built in any gain from this sale in our
estimates which will be done after FIPB approval. Company has excess capacity due to delay
in ANDA approvals & foresees a long gestation period for SEZ project to effectively contribute
to its topline & profits. On the contrary company intends to expand its Goa facility as it is
already approved which could be done at a lower cost & lower gestation period which in turn
will improve margins.
Retain Buy rating with the target price of `223
We expect company to post domestic growth better than industry growth on account of
improved productivity through increased field force however pricing policy impact will be
around 2-3% on domestic business. Overall Margins too are expected to improve by 120bps
in FY14E on back of strong growth from both the domestic business & focus on emerging
markets. We maintain our Buy rating with the revised target price of `223 based on
12xFY15E EPS of `18.6.

Berger Paints Ltd Strong volume growth aided with favorable product mix :: Sunidhi

Berger Paints Ltd (BPL) is the second largest paint company (~16% market share) in the
Indian paint industry catering to both decorative and industrial segment which contributes
in the ratio of 80:20 to its revenue stream. With Indian economy on the revival mode,
Berger Paints volumes demand is set to grow at CAGR of ~ 12.8% over FY13-15E (i.e ~ 1.8x
GDP growth) well complemented by structural shift happening towards organized players
from unorganized players in the paint industry for fast growing emulsion paints ( premium
water based paints). With addition of 3.5 LTPA paint capacity (taking total installed capacity
up from 3.25 LTPA in FY13 to 6.12 LTPA by FY15E end), & newer focused management
strategy of repositioning & upgrading “Berger Paints” Brand Image from “ Mid-Economy”
Category” to “Higher - Mid Category” by providing both premium/affordable range of
emulsion paints, improving its supply chain system, expansion of distribution network and
aggressive marketing & sales promotion. Berger Paints is geared up to maintain its
dominating position in Tier II & Tier III cities & improve its market share ( ~ 17.50% in FY15E
vs ~ 16% in FY13). With the favorable product mix & higher realisation, Berger Paints is
equally well complemented with softening of raw material prices & economies of scale,
leading to expansion of EBITDA margins (~12.30% in FY15E vs 11.10% in FY13). We have a
“Buy” rating on the stock with target price of `248 implying 25x on FY15E EPS of `9.90.
Investment Rationale
Decorative Paints – Structural Growth Story
Berger Paints has a dominating position in Tier II & Tier III cities on the back of its strong
relationship with dealers & painters. With changing consumer lifestyle & growing demand
for premium quality emulsion paints, leading to a ongoing shift towards organized players
from unorganized players imply a significant & much more accelerated growth for Berger
Paints both in terms of Revenue growth at a CAGR of 18.4% & PAT growth at a CAGR of
25.0% over the next 2 years (FY13-15E).
Favorable Sales Mix to Increase Profitability
With the launch of new series of affordable emulsion paints in Tier II & Tier III cities, Berger
paints is driving a demand shift & Upgradation towards emulsion paints from lower
category distemper/ primer paints (~35% in FY15E vs ~29% in FY12). Thus, a favorable sales
mix with better average price realisation led by emulsions paints along with softening raw
material cycle would lead to expansion of EBITDA margins by 100-120 bps by FY15E (~12.3%
in FY15E Vs ~11.1% in FY13).
Yet another Price Hike by 1-2% effective from 1st September ‘13
Company has taken 1.3%% price hike in May’13 & August’13. It plans to take another price
hike of 1-2% effective from 1st September‘13 to mitigate the impact of higher import cost
on account of rupee depreciation. At the same time management is confident of
maintaining double digit volume growth momentum in the coming quarters.
Timely capacity expansion helps supplement demand
Berger Paints timely addition of 3.5 LTPA paint capacity to enhance its total paint capacity
from 2.6 LTPA in FY12 to 6.1 LTPA by FY15E end in phase manner would enable the
company to meet the growing demand & defend its market share. Berger Paints is set to
maintain capacity utilization in the range of ~ 60-65% & delivering a topline CACR growth of
18.4% over FY13-15E.
Aggressive Marketing Initiatives to develop Brand Image – To drive Sales
In order to develop a better brand image & penetrate the premium emulsion paints market,
Berger Paints has initiated marketing & advertising spends to promote it top brands like
“Silk”, “Bison” and “Weathercoat”.

Sunidhi's Super Seven - Investment Ideas

The broader market has cracked decisively on the back of weak macro indicators, monetary tightening by RBI, dwindling earnings growth and more so due to huge pessimism among market participants. The correction was more severe in midcaps as compared to large caps. CNX Midcap index has corrected almost 21% ytd vs ~6% of Nifty. Even in largecaps, the outperformance was confined to few stocks. We believe this correction throws an opportunity to identify stocks having strong earnings visibility over the medium term, compelling valuations, strong cashflows and no corporate governance issues.  In this series we have identified seven stock ideas which we believe should deliver strong outperformance in the medium term. 

1.       Berger Paints

2.       Cadila Healthcare

3.       Federal Bank

4.       GMDC

5.       NMDC

6.       Unichem Laboratories

7.       Yes Bank

RBI In Action: Too Radical, Too Risky :: Jefferies

Key Takeaway
RBI's policy is a radical shift with little back-down option for a while. It
eliminates new policy drives with a new governor. The currency line in sand
would likely be tested multiple times; at each point, risks of either unforeseen
monetary activism and/or failure would keep markets nervous. We downgrade
financials to UW and increase weights for defensives (staples) and exporters
(IT), in anticipation of more export-friendly policies.
The RBI says it perfectly:
“India is currently caught in a classic ‘impossible trinity’ trilemma, whereby we are having to
forfeit some monetary policy discretion to address external sector concerns”.
We do not remember a time when explicit RBI policy priority order was currency stability
first, inflation second and growth third. Unlike the desire to see current account (CAD)
stability or balance of payment improvement (BOP), the currency defence, though, is a daily
affair.
Current policy not a short-term affair - We absolutely understand when the central
bank says that:
“The recent liquidity tightening measures by the Reserve Bank are aimed at checking undue
volatility in the foreign exchange market and will be rolled back in a calibrated manner as
stability is restored to the foreign exchange market, enabling monetary policy to revert to
supporting growth with continuing vigil on inflation”.
However, we believe the above statement is a wishful dream as things stand today. We do
not discount the possibility of the INR stabilising for a few weeks once the government
announces some trade or investment measures. But no trade or investment measures could
stabilize the BOP so comprehensively that the INR turns as stable as before in a quick time.
More likely than not, we believe the currency volatility – or the fears of it and associated
policy tightening – will return with every unforeseen events in domestic politics, economy
or global financial markets in the next 12 months to come. As a result, we do not expect
the market to begin expecting pro-growth benign central bank policy for at least until the
elections.
What next?
“It should be emphasised that the time available now should be used with alacrity to institute
structural measures to bring the CAD down to sustainable levels”.
The RBI policy statement calls for the government to implement structural reforms to bring
down CAD. While re-emphasising the point we made last year that the CAD corrections are
extremely painful and happen only over an extended period of time, the time has come to
consider the next policy moves. In coming months, fiscal policy activism should resurface
with the following likely announcements:.
1) Trade reform 1: anti-imports.
2) NRI bond issuance.
3) FDI related announcements.
4) Trade reform 2: pro-exports.
5) Pro domestic investment announcements to cheer the local business confidence.

India Consumer Tracking Institutional Ownership - Jun'13 Qtr :: JPMorgan

In this report, we take stock of ownership trends in our India Consumer Staples
and Retail coverage. Over the past 12 months, we continue to see a trend where
FIIs have increased their ownership across most of our coverage universe while
DIIs have reduced.
 FII ownership trends. Over the Jun’13 qtr, FII ownership continued to
increase across our coverage universe. Stocks which saw a prominent increase
in FIIs ownership include Jubilant Foodworks (+240bps q/q), Titan Industries
(+100bps q/q), Nestle India (+60bps q/q) and GSK Consumer (+60bps q/q).
However, FIIs reduced ownership in Future Retail (-100bps q/q) and Colgate (-
30bps q/q). Over the past 12 months, stocks which saw a prominent increase in
FII ownership include Jubilant Foodworks (+590bps y/y), Titan Industries
(+400bps y/y), Dabur (+270bps y/y), Future Retail (+250bps y/y), ITC
(+190bps y/y) and Nestle India (+160bpsy/y). FII stake in % terms reduced in
United Spirits q/q as Diageo acquired 10% stake via preferential allotment
during the qtr.
 DII ownership trends. DIIs continued to reduce their ownership in consumer
stocks with prominent decline seen in Future Retail (-230bps q/q) and Nestle
India (-50bps q/q). Insurance companies’ ownership increased in ITC, Dabur
and marginally in Titan while the rest of the stocks saw ownership being
reduced or maintained at the same level. Except for GCPL and Jubilant
Foodworks, which saw a marginal increase, DII ownership has reduced for
stocks in our coverage universe over the past 12 months.
 FII:DII Ratio increases for most of consumer stocks. The FII/DII ratio has
gone up for most of our coverage universe over the past 12 months except for
United Spirits, GCPL and Jubilant Foodworks.
 Promoter Shareholding Changes: Jubilant Foodworks witnessed -270bps q/q
decline in promoter holding. Over the past 12 months promoter shareholding has
declined ~500bps in the company. Promoter shareholding decreased marginally
for GCPL (-20bps q/q) while it increased for Future Retail (+40bps q/q). HUL
saw parent (Unilever) stake rising from 52.5% to 67.3% post recently concluded
open offer in early July’13. Diageo now owns controlling stake of 25% in
United Spirits.
 Retail ownership trends: Non-institutional ownership increased significantly
for Future Retail (+290bps q/q), while for Titan it decreased (-100bps q/q).

H.T. Media Ltd (HTML IN) 1QFY14 Results - Strong Recovery in Advertising:: Jefferies

Key Takeaway
HT reported results were in line with expectations as higher promotional
spend offset better than expected advertising growth. Advertising growth
saw a recovery both in Hindi and English print. Given the benefits of the
upcoming elections, we expect the growth momentum to sustain driving
margin improvement. Maintain Buy.
Advertising growth sees sharp recovery - HT reported strong recovery in advertising
growth to 10% in the quarter led by Hindi advertising which grew 14%. English advertising
grew by 8%. The growth was led mostly by volume growth. The sectors that contributed
the most to growth were Government, durables, retail and real estate. Circulation revenues
also showed strong growth of 16% led by price hikes in both English and Hindi editions.
Increased promotional activity limit margin gains - Margins in the quarter improved
c80bps, below our expectation of c100bps. This was the company increased its marketing
spend in Hindi and digital business in the quarter. Newsprint costs were below our
expectation due to better control on pagination and circulation. Higher other income led
to PAT ahead of our expectations.
Conf call highlights - Management indicated that newsprint prices increased c2-3% in
the quarter and they expect a full year increase of c5-7%. The company expects to start
its mid-career education initiative "Bridge School of Management" in the next couple of
months. The total investment in the education business is expected to be around Rs 150mn
over next two years.
Margins to improve but cash usage the key overhang - With the recovery in
advertising growth we expect margins for the company to improve. We expect margin
improvement of c390bps over FY13-15E led by advertising growth of 12% and newsprint
price increases of 5-6% annually. The key concern though remains usage of the Rs6.8bn
cash balance with the company.
Valuation/Risks
We adjust our estimates for better advertising growth and higher newsprint prices. Our
FY14-15 EPS rise by c2%. The stock is trading at 10.2x FY14 PE. Given the 28% EPS CAGR over
FY13-15, we believe the stock offers value at current levels. We retain our Buy rating and PT
of Rs 130. We though remain cautious of the company's large cash balance and expansion
plans into new businesses. Risks: 1) newsprint prices, 2) competition, and 3) investment in
new business

Larsen & Toubro (LT IN) Execution Clear Miss; Track Record Shows Revenue Recovery Potential:: Jefferies

L&T’s 1QFY14 results came in below expectations given weak execution.
Revenues surprisingly rose by only 5% YoY, v/s expected 10% YoY and FY14E
expectation of 15% YoY. Management has maintained guidance and attributed
miss to quarterly EPC revenue fluctuation. This volatility has reflected in past
years like FY11 also. We maintain our earnings and TP as strong order flow (up
28% YoY) lends credibility to revenue recovery.
Order flow rises by 28% YoY in 1Q: L&T’s domestic order flow has risen by 20% YoY
and augurs well for domestic revenue recovery as the year progresses. Sector-wise, strong
growth in infrastructure and hydrocarbon offset the decline in power and capex linked
process sector. Given annual expectation of 15% YoY growth, factoring order flow growth
of 1Q, 11% YoY growth is required over the next 3 quarters.
Execution disappoints: L&T’s revenues surprisingly rose by only 5% YoY during the
quarter to Rs126 bn, v/s expectation of 10% YoY growth. This led to the PAT miss, and also
concerns on potential of meeting full year expectations of 15% YoY growth. Management
highlighted that quarterly fluctuations in booking E&C revenues led to the miss, and
is confident of compensating for the same as the year progresses. Guidance has been
maintained. Interestingly, such volatility has been seen in past years also. For example in
FY11, 1Q revenue growth was just 6% YoY, but L&T went on to report 19% YoY revenue
growth in full year FY11 (Exhibit 2). FY07-08 were also similar such years. This in tandem with
strong order flow growth and 22% YoY order book growth, adjusted for 4Q cancellations
lends credibility to revenue recovery (Exhibit 3).
Margins expected to be maintained in FY14E: L&T’s margins, adjusted for forex (Rs1.1
MTM on loans) has broadly come in-line with expectations. Management has maintained
its full year guidance of maintaining the same. As revenue recovers in the course of year,
margin uptick will lead to the company maintaining margins on full year basis.
Valuation/Risks
Risk:reward favourable: In all the surrounding scepticism, L&T is now trading at 1.8x
P/B FY14E (adjusted for subsidiary valuations). While it may seem distant today, we believe
the company’s ability to manage order flow and earnings through the downturn will see
multiple re-rate over the next 12 months. We maintain Buy with a TP of Rs1,270 valuing the
core business at 18x PE FY14E – 10% discount to 10-yr mean. Key risks include: 1) Extensive
price competition; 2) slowdown in Middle East.

Asian Paints (APNT IN) FY14 challenges remain:: Jefferies

Key Takeaway
APNT 1Q14 was below expectations as EBITDA remained flat despite 15%
growth in gross profits. While volume growth was reasonably strong, the
mixed pattern in input cost inflation (stable raw materials, higher operating
expenses) continues to weigh on margins. Maintain Underperform.
1Q14 results below expectations: Asian Paints’ 1Q14 revenues (+12% YoY) and gross
profits (+15% YoY) grew in line with expectations. However, this failed to offset the inflation
in other operating costs, up 22% YoY adjusting for higher gratuity provision. As a result, adj.
EBITDA came in 4.5% below forecast.
Domestic volume growth strong in 1Q14: Domestic decorative paint volumes grew
in double-digits. Despite the favorable base (volumes in 1Q13 were likely flat), we believe
the growth was reasonably strong considering an otherwise weak economic environment
as well as the negative impact of early monsoons. Sustaining this level of growth for the rest
of FY14, though, could be a challenge if weak demand conditions persist. Nonetheless, we
marginally raise our domestic volume assumptions (c1%) for FY14.
Margins - the mixed pattern continues: The mixed pattern in underlying input cost
inflation continued to weigh on overall margins for the company. While international
commodity prices have turned benign (stable in INR terms), other operating costs have
increased on account of the newly commissioned plant as well as higher freight and power
costs. Therefore, while gross margins expanded 150bps YoY, EBITDA margins declined
110bps YoY. We believe this could continue to be a drag on earnings growth in coming
quarters and marginally lower our FY14E EBITDA forecast (c1%). We also incorporate higherthan-expected depreciation and tax rates, leading to c2-5% cut in earnings estimates.
Valuation/Risks
Our DCF-based PT now stands at Rs4142 up from Rs4107 (11.3% COE, 6% terminal growth
rate), as we factor in these changes and roll over our estimates. The stock trades at 39x
FY14E EPS, at a significant premium relative to peers and its own history. Upside from her is
contingent upon earnings delivery assuming steady multiples, which we believe is at risk.
Maintain Underperform. Risks: a) faster revival in demand, b) higher-than-forecast gross
margin gains

Machinery Balance Sheets of Industrials – Comparable Analysis:: Jefferies

Key Takeaway
The business cycle for industrial companies has been difficult post FY08-09.
Some companies have managed the environment better than the others. On
several occasions, we have discussed that segment leadership is a critical
element. This is reflected in the balance sheets of Cummins, Crompton
Greaves (CRG) and Thermax, with segment leader Cummins seeing far less
deterioration in this cycle. We expect this comparative trend to continue.
Cummins' monetisation focus on debtor days: In the downturn, Cummins'
management has focused on monetising revenue to cash flow, rather than growth, reflected
in Cummins reducing its debtor days by 20% from 76 in FY08 to 61 in FY13 (Exhibit 1).
Thermax has seen a sharp deterioration in debtor days in FY13 to 99 vs 73 in FY12 and 49 in
FY08. Crompton has seen a more gradual deterioration of about 10% during FY08-13. For
debtors more than six months old, Cummins is the least at 2% of overall debtors followed
by Crompton at 12% and Thermax at 14% in FY13 (Exhibit 2).
Thermax's working capital moves to positive from a negative cycle: Working
capital trends are a good indicator of business stress. Thermax has been among the best
in working capital cycle management, which has been negative for the company given
advances. However, as order flow has seen pressure, Thermax’s working capital has seen
some deterioration (Exhibit 3). While it still remains fairly low at +5%, trend-wise it has
worsened from a band of -15%-0% over the past 5-7 years. CRG’s overall working capital
has been broadly stable at 5-10%, while Cummins has seen improvement from 20% levels
to 14%.
CRG’s FY13 ROE falls to 2% from a peak of 38%: Clearly, of the three companies, CRG
has seen the sharpest deterioration in profitability. The company’s ROE has fallen from a high
of 38% in FY10 to 2% in FY13 (Exhibit 4). Despite assuming cost benefits from restructuring,
we anticipate this to be well below 20% levels even over the next 2-3 years. Thermax has seen
its ROEs more than halve from a peak of 43% in FY08 to 19% in FY13. The sharp deterioration
has been YoY as well, from 27% in FY12 to 19% in FY13. Cummins has managed to contain
ROE erosion given its high dividend payout ratio (ROE 30% in FY13 v/s peak of 35% in FY11
and 34% in FY09).
Is the past reflective of the future? Over the past six years, in a difficult backdrop, CRG
and Thermax have lost upwards of 30% from their peak share price levels vs Sensex 10%
off its peak. Cummins, on the contrary, has risen by 50% vs its peak levels. FY13 annual
reports and B/S of these companies clearly spell out the reasons. Cummins' 1HFY14E will be
likely weak given seasonally lower power deficit has impacted genset sales (see report, Power
Deficit: Seasonal Fall, published on 5 July 2013). However, if power deficit recovers during the
year, as supply growth averages lower and demand growth remains steady, genset sales will
recover, in our view. On the other hand, we believe pricing pressure globally will continue
to hurt earnings of Crompton and Thermax.